Questions about Woodford?

The Financial Times reported that over 300,000 people are currently trapped in the Woodford Equity Income fund. This situation has become a significant talking point for advised and self-directed investors (, 2019).

Many potential clients will be seeking professional financial advice as a consequence of what has transpired – including people who are now facing cash flow or retirement challenges.

Those advisers who have been recommending our Parmenion portfolios for some time will know of our decision not to follow Neil Woodford when he left Invesco, and so our portfolios are unaffected.

What happened?

Neil Woodford was a fund manager at Invesco from 1988 and over time, he became widely seen as at the forefront of fund manager talent in the UK.

Woodford skillfully avoided some of the worst impacts of the dotcom and the 2008 credit crunch. In late 2013 he announced he was leaving Invesco and started his own company in early 2014, founding a range of investment vehicles, principal among them being the LF Woodford Equity Income Fund.

In its first year it returned 9% above its Investment Association peer group on a total return comparison (FE analytics, 2019). Within 3 years it had grown in size to £10bn.

However, from 2017 its performance began to suffer, with relative underperformance versus its peer group of 30% in the two years to June 2019 (FE analytics, 2019). This sparked a progressively increasing pattern of withdrawals from the fund, led by some larger wealth manager firms and pension schemes.

Unadvised and ‘self select’ retail investors were slower off the mark. At the start of 2019, the fund’s AUM had dropped to £4.7bn and the issue of illiquidity in the portfolio was being widely commented on in the specialist press and, later, before a Treasury Select Committee. In June this year the fund was suspended.  A decision to close the fund, wind it up and distribute proceeds to investors followed on 15 October. This was accompanied by the announcement that Link was to terminate the management contract with Woodford.

Who are Link? And what will holders of the fund be hearing?

Link Fund Solutions Ltd are the Authorised Corporate Director (ACD) of the fund. Their responsibility is to attend to all the regulatory and governance requirements necessary to maintain its authorised status. Direct holders of the fund will be contacted by Link to explain the decision to wind up the fund and announce the appointment of Blackrock and Park Hill as managers to oversee the realisation of proceeds.

Who else is involved?

Link have divided the fund’s assets into two sections. Blackrock, one of the largest global asset management firms, will be responsible for realising the listed, readily realisable assets and then investing those proceeds into FTSE 100 trackers and money market funds. Presumably this will replicate the intended equity exposure of the fund.

Park Hill will be responsible for arranging the disposal of other, less liquid investments. Park Hill are a specialist arm of PJT Partners, a substantial global investment advisory and corporate finance business. The firm has extensive experience in restructurings and distressed mergers.

What is the range of views on the clients’ final position and how long will it take?

In data published in April this year (FCA, 2019), the fund’s assets took the following liquidity profile:

Realisable within (days) Woodford

This shows that the bulk of the work on realising assets will be done by Park Hill and predictions of precise outcomes are unclear, but it seems fair to assume final distributions may not occur for some time.

At time of writing, the fund continues to have a net asset value published on a daily basis. For details, see here.

These numbers will be very carefully considered given the need for prudence in the valuation of the unquoted element in the portfolio, the level of regulatory scrutiny, and the fact that some assets remain subject to the risks involved in FTSE exposure.

The announced date for an initial distribution to investors is at the end of January 2020. There is no information on how big a distribution will be made. It is clear that Link believes there will be a series of distributions, suggesting a timetable stretching over several months.

Will there be compensation?

The challenge here is from who and for what? One can be sure the complaints industry has the capacity and inventiveness to look for angles, especially where hindsight has proved people wrong. To illustrate this, in January 2019 – nine months ago – Woodford signed off the fund’s audited accounts on a positive note, saying:

Our strategy remains focused on avoiding the considerable risks that have built up in equity markets over the last decade of QE-fuelled exuberance and capturing the opportunity that exists in the few pasts of the market that have been left behind. This results in a portfolio which has a strong but selective bias towards profoundly undervalued companies that are exposed to the slings and arrows of the UK economy.

Elsewhere, the portfolio also continues to be positioned to capture an exciting long-term opportunity across a range of earlier-stage businesses exposed to the themes of healthcare innovation and disruptive technology more broadly.

The regulator has announced a review of the role of the ACD and says it will not be commissioning an independent review of its own actions.

One of the nub issues will be disclosures around liquidity and the use made by the fund, accepted by the ACD, of listings of investee businesses (where Woodford had a substantial interest) on the Guernsey Stock Exchange, apparently to allow them to be disclosed as ‘liquid’.

Was the regulator being misled? It is certain complaints about recommendations to invest in Woodford will find their way to FOS. In that context, the extent of due diligence which ‘fund picking’ advisers carried out on the fund, with PROD a new feature of the regulatory landscape from January 2018, is highly likely to be a factor. When you are fund picking you need to look very carefully under the bonnet.

Reflections on how we handled Woodford

Fund due diligence is a serious undertaking, one that absorbs the largest slice of time in our investment management team.  We were a long term investor with Invesco under Neil Woodford’s tenure. His leaving that firm triggered a review. Should we follow him to the new firm, or not?

Our stance first reflected our basic rule of not investing in funds without at least a 3 year track record with uninterrupted consistency of fund manager and structure that supports the portfolio decision making process. Additionally, the established risk control and challenge we saw at Invesco did not seem in place at Woodford’s new firm.

Such decisions come thick and fast when we are making fund selections as a DFM. As Peter Dalgliesh, Managing Director of Parmenion Investment Management (PIM), explains:

“DFMs that have a well-defined, robust and repeatable, quantitative and qualitative approach hold detailed discussions with fund managers to identify those that are deemed to be unreliable, inconsistent and questionable.  Our team’s experience, discipline and risk focus gives Advisers and their clients the reassurance and reliability needed to help them progress towards their financial objectives.”

For example, we had invested in the Jupiter European fund for several years, managed by Alexander Darwall, with terrific results. But as he moves across to his own, new firm, Devon Equity Management, our analysis and judgement is being tested once again.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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