Today the FT reveals that the FCA have launched an investigation in the Woodford Equity Income Fund.
Last night in the Evening Standard, Anthony Hilton estimated that only about 200,000 people were invested in Woodford funds, and added “so why all the fuss”.
I think it is about trust. Most people in the UK do not trust business. For example, it does not help public levels of trust when Woodford takes a £36m dividend (from Woodford Investment Management Limited year end March 2018 – the latest published accounts) and then they see all the negative press.
The issue is wider than Woodford. The whole Asset Management industry needs a rethink. The 2016 FCA interim report on the Asset Management industry highlighted the problems (high fees, often for moderate or poor performance, lack of competition, lack of transparency on fees and charges), but little has been done. The FCA has launched a huge consultation on platform charges, but this is only a very small part of the problem. for more detail see
https://www.sharesoc.org/sharesoc-news/response-to-fca-on-platforms-study-sep-2018/
and our latest response FCA Consultation on Investment Platforms Market Study remedies – Final June 2019
Hargreaves Lansdown have made a lot of money by marketing the Woodford funds to their customers (the FCA refers to investors as consumers and perhaps in this sad case that is exactly what they are!), when at the same time their research director may be selling his family’s stakes in the funds. We have called for greater transparency. Directors of quoted companies have to declare when they sell shares and get prior approval from the company. It is lax that no such similar standards of conduct exist in the fund management industry, but not surprising given the soft touch approach of the regulator the FCA – recently labelled by the press as lapdogs and toothless. (According to the FT, Hargreaves’ own policy stipulates that the company be informed when directors buy or sell any investment, including unit trusts. All such deals must be pre-approved. However directors are not required to divulge whether they own positions in unit trusts in notes to customers about those funds, unlike the rules governing listed investments.)
ShareSoc have been active behind the scenes talking to the press and the FT have quoted ShareSoc’s Chairman, Mark Northway, extensively and published a letter from him in the very influential letters column.
The FT article on 18 June https://www.ft.com/content/fc6cf624-9113-11e9-b7ea-60e35ef678d2 included these points:
Critics call on Hargreaves to reveal executive’s Woodford stakes
Research director refuses to reveal whether he has reduced his position in fund
Critics have said Mr Dampier should reveal whether he had sold down his Woodford fund stakes in recent months due to the central role he played in championing the fund manager to Hargreaves customers, and the high-profile way he spoke of investing in his own money in the fund’s launch.
“This is not caught by law, but it is certainly caught by moral imperative,” said Mark Northway, chairman at shareholder rights’ group ShareSoc. “Given [Mr Dampier’s] position in the eye of the storm, transparency is the only policy available to him. He needs to stand up and say what he has and what he’s thinking.”
“He now needs to identify the dates of his research notes and the dates of his market activities,” said Mr Northway at ShareSoc.
The full text of the letter to the FT was:
Why do managers persist in launching strategies within unsuitable wrappers?
Because that is where the demand lies. It is far easier to distribute and expand a fund under the Ucits gold standard than to raise capital for a non-Ucits retail scheme, a fund investing in inherently illiquid assets, or a closed-ended vehicle.
This is why managers insist on risking their reputations through liquidity mismatch, why unsafe vehicles such as open-ended real estate funds exist, and why overly self-confident managers work to circumvent the regulations to shoehorn illiquid assets into liquid funds.
It is a fundamental error of judgement for which Woodford will pay dearly.
Mark Northway Chairman, ShareSoc
by Cliff Weight, ShareSoc Director
Declaration. I own shares in Woodford Patient Capital Trust.
In fact according to the letter from HL to the Treasury Select Committee (published yesterday) there are almost 300,000 investors affected on that platform alone. It’s worth reading their letter.
Out of curiosity, has anyone analysed the contribution the illiquid investments have made to the fund performance? Given Woodford’s well-publicised problems with larger companies (Capita, Provident Financial, Kier, …) it seems possible that they have in fact outperformed the more liquid holdings. A lot of the coverage seems to assume that people have lost money, but that doesn’t obviously seem to be true beyond the usual risks in any equity fund.