The recent downfall of Woodford Investment Management funds was no surprise; it had an air of inevitability about it. The way the company was run and the questionable performance of its funds meant the writing had been on the wall for some time.
Neil Woodford, CBE, found fame as a fund manager over many years producing top returns from managing funds for Invesco Perpetual. Finally, he left to start his own fund management company, Woodford Investment Management, five years ago. In its first year its funds performed well but over the past four the performance has been abysmal. However, that is not the only issue. The major problem has been how the FCA’s rules are applied in cases like Woodford’s.
At the time of the Woodford Equity Income fund’s closure, it is estimated that as much as 50 per cent of the fund was invested in unquoted shares. The FCA’s rules clearly limit the amount that can be invested in unquoted shares to 10 per cent of the fund’s value. Woodford moved some shares into his own investment trust at highly questionable valuations. He also listed his fund’s unquoted shares on the Guernsey Stock Exchange when it was not clear they could be traded.
Kent County Council’s request to withdraw £263m from the fund was the tipping point because Woodford couldn’t immediately raise the money from share sales.
This was because he had a significant proportion invested in unquoted shares.
Furthermore, the Woodford Equity Income fund had a highly misleading name because it didn’t invest primarily in equity income shares. Instead it invested in many non-income producing shares and many unquoted, illiquid, high-risk shares. The FCA’s guidelines encourage managers to stay within the remit of their fund.
In the meantime, while investors have lost a lot of money, Woodford has been funding a lavish personal lifestyle and paid himself huge dividends, including £36.5m to a company of his called Woodford Capital in 2017/18.
Two of the UK’s biggest financial companies, Hargreaves Lansdown and St James’s Place, had large sums of clients’ money in Woodford funds. Hargreaves Lansdown had Woodford on its Best Buy list while SJP ran a version of the Woodford fund without most of the unlisted holdings.
Then there is the FCA, which some argue has been asleep on the job. Invesco Perpetual was investigated and fined £18.6m in 2014 for failings in fund management. The FCA said that, between May 2008 and November 2012, Invesco Perpetual did not comply with investment limits that were designed to protect consumers by restricting their exposure to risk.
This all teaches us many valuable lessons. First, it is vital to always act with integrity. The fact that you can do something well, such as fund management, does not itself qualify you to be good at managing a fund management company. These are two distinctly different skills.
Next, understand the FCA’s rules for fund management. The fact that a fund manager is regulated does not mean it is working within the spirit of the rules. Similarly, beware any fund manager who feathers his nest at the expense of investors, and do not invest in a fund based purely on the reputation of the fund manager.
Investors should do their own research or at least consult an IFA.
Tony Byrne is managing director of Wealth and Tax Management and Minerva Money Management