The Sunday Telegraph has run a puff piece of PR for Neil Woodford in which he says, “I am sorry”. https://www.telegraph.co.uk/business/2021/02/13/exclusive-neil-woodford-launch-comeback-fund-says-sorry-did/
Well, I am sorry too. I don’t accept Neil Woodford’s apology. WoodfordPayBack time is here.
Woodford says that Link were wrong to close his fund, which led to a fire sale of many of his investments. I do at least agree with him on this.
It is a scandal that events occurred so that shares in illiquid assets had to be sold at false prices. It was like having a Kalashnikov machine gun at the circus fair and using it to shoot at the coconuts. You really couldn’t create more obvious carnage. Shares in these less than liquid companies had to be sold and the hedge funds and arbitrageurs and institutional investors were able to short these shares and make a profit at the expense of individual investors.
Woodford now agrees that you should not put illiquid shares into a retail fund. The issues were highlighted in a letter to the FT by ShareSoc Chairman Mark Northway:
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 judgment for which Woodford will pay dearly.
The FCA published guidance in Jan 2020 https://www.fca.org.uk/publication/correspondence/asset-management-portfolio-letter.pdf
In respect of Liquidity management, it said
Ensuring effective liquidity management in funds is a central responsibility for any Authorised Fund Manager (AFM) and it remains their responsibility even if they delegate investment management to another person.
Open ended funds can have a liquidity mismatch between the terms at which investors can redeem and timescales needed to liquidate assets. On 30 September 2019, we published a policy statement on illiquid assets and open-ended funds. On 4 November 2019, we also wrote to the boards of AFMs outlining our expectations regarding liquidity management. And on 16 December 2019, the Financial Policy Committee published the initial findings of our and the Bank of England’s joint review of liquidity risks in open-ended investment funds.
We expect you to take any necessary or appropriate action following these communications. We will continue our oversight of UK authorised funds. Where we identify potential liquidity issues in funds, including through our regular interaction with depositaries, we will ensure that AFMs take prompt action to mitigate or resolve them.
My view is that there was a risk management problem in Woodford Equity Income Fund (WEIF). All would have been ok if the share prices had been going up and there were little redemptions. However there was a disaster waiting to be happening, if:
- The fund underperformed
- Customers started asking for their money back = redemptions
- Shares deemed to be liquid by the regulator were not capable of being sold in the short/medium term at the market price or close to the market price.
This all highlights the problems and why we have formed the ShareSoc Woodford Campaign (click here to join and support the campaign – you don’t have to have lost money in Woodford to support our campaign to change the regulations and hold people to account). The ways the FCA regulations and/or the way the regulator have interpreted the regulations that have failed individual investors include:
- They have allowed individual investors to invest in a risky fund without the individuals knowing or understanding the risks involved.
- They have allowed a fund to exist and to be run in a risky manner.
- They have a allowed style drift with no communication to investors that this has occurred, so as a result investors do know of the change in the risk profile of their investments.
- They have allowed the transfer of shares between WEIF and WPCT, in ways which do not seem beneficial to the investors in WPCT.
- They have allowed Link to close the WEIF fund.
- They have allowed Link to sell shares to Acacia at what appears to be below the market rates.
- They have allowed a false market in numerous shares in which Woodford funds had invested so allowing various hedge funds arbitrageurs, shorters and institutions to profit at the expense of individual investors. Not least of this is the opportunistic short attack by Muddy Waters on Burford (in May 2019), which resulted in the share price declining from £13 to £3 and created a very volatile share place where the price has now increased to over £6. 4DPharma is another company which has suffered as a result of the Woodford stench.
The FCA have said they are looking at Woodford, but we don’t know what they are looking at and we don’t know when they will report. Former FCA CEO Andrew Bailey gave evidence to the Treasury Select Committee, and managed to bat away their questions so well that he was promoted to be Governor of the Bank of England!
This is Glacial FCA (in)action. Their Permafrost needs melting!
Please note these are my personal views and not necessarily those of ShareSoc.
By Cliff Weight, Director ShareSoc
Disclaimer: I own shares in Burford and 4DPharma and WPCT (now renamed Schroder UK Public Private Trust plc and managed by Schroder.)
This quote in the Telegraph article seems plain wrong to me:
“I can’t be sorry for the things I didn’t do. I didn’t make the decision to suspend the fund, I didn’t make the decision to liquidate the fund. As history will now show, those decisions were incredibly damaging to investors, and they were not mine. They were Link’s decisions.”
Link had little choice but to suspend the fund, when redemptions couldn’t be met. However, they should never have allowed that situation to arise in the first place, by better monitoring the liquidity of the fund – and the way they wound down the fund seems questionable, to say the least. It was Woodford’s decision, however, to invest a large part of the fund in assets that could not be realised at their stated valuations in the event of redemptions – so he cannot shift blame in this way.
How can this happen. Apparently Neil Woodford is going to work with Acacia Research Corporation. As you know, they bought a raft of Life Sciences investments that were held in Woodford’s defunct LFWEIF in June 2020. The 18 investments sold for £223,4m, originally cost £404m when Neil Woodford bought them. LFS appears to have made £180m loss on this disposal. This does not make sense that the Guru is now to manage his investments again at our loss. FCA, what are you doing?
I think W will play a relatively small part in Acacia’s venture. They are a fairly big player in the US and don’t need his “expertise”. But if they want a foothold in the UK they might value his contacts – after all, he was generous in opening his chequebook in the better times.
Also Jersey is suitably remote from the UK in a regulatory sense.
Liquidity. It did for Lehman, and it did for Woodford. If a fund manager is going to invest a fund in illiquid assets, he must also risk manage that fund’s liquidity by placing restrictions on the ability of investors to withdraw at short notice. Nothing wrong with that as long as it is fully disclosed up front and individual investors fully understand before investing.