The demise of Neil Woodford’s empire has been truly astonishing and it’s not just its founder that faces scrutiny. The spotlight is now on the Financial Conduct Authority, together with Woodford’s Authorised Corporate Director (ACD), Link Fund Solutions. The FTSE 100 quoted financial services group, Hargreaves Lansdown, also has questions to answer regarding the closeness of its relationship with Woodford as it was responsible for more than a quarter of the inflows into Woodford’s funds.
To those not acquainted with the story, allow me to precis. Former ‘star’ fund manager Neil Woodford leaves Invesco Perpetual to found his own firm. He opens for business in 2014 and his flagship Woodford Equity Income Fund (WEIF) gets off to a good start. Unfortunately, he subsequently strays from the style of investing that made his name, by taking stakes in private businesses while at the same time, too many of his stock market listed ventures start to become problematic. As redemptions take hold, only the quoted component of the portfolio can be readily sold and as the fund shrinks, the private holdings represent an increasing percentage of the overall total. Eventually, a perfect storm forces the fund’s ACD to suspend dealings in June. The original idea was to reopen the fund once a degree of restructuring had been achieved but by October, Link decided the fund would be wound up.
Now, while we no longer have any skin in this game, it is nevertheless a situation we have followed closely because we used to be a significant holder. We exited for a variety of reasons but chiefly, it was Woodford’s increasingly idiosyncratic deployment of capital, in enterprises we might charitably categorise as ‘marginal’, that led us to sell. We also recall a meeting where he turned up late, without apology and was scruffily dressed.
All this was a long time before Woodford Investment Management’s problems became headline news but as Donald Rumsfeld told us, there are known knowns, known unknowns together with unknown unknowns. The poor quality businesses being bought were, from our perspective, known knowns while the possible portents stemming from his Wurzel Gummidge appearance represented known unknowns. However, we knew we were not unknowing of unknown unknowns and consequently decided we knew what should be done ……. if you know what I mean. Or, to put it another way, too many of the newer stocks did not meet our threshold of quality and his over casual appearance led us to question the cut of his jib. Woodford may have been a ‘stock picker’ but he was picking too many stocks we didn’t like.
But, while Neil Woodford is certainly guilty of poor judgement, what were Link Fund Solutions doing as this sorry saga unfolded? Its role was to oversee the administration of the fund to ensure it was run in the best interests of unit holders. Throughout 2018, assets fell from £8.2bn to £4.6bn and by the time it was gated, in June, they stood at just £3.7bn. It was inevitable the unquoted percentage of the portfolio would rise beyond the 10% limit against that background; you didn’t require the foresight of Nostradamus to know this. The decision to suspend dealings was correct but talk about shutting the stable door after the horse had bolted ……. this nag was now running a marathon.
As for the decision to liquidate the fund, Link believes it is now in the best interests of all investors for the fund to be wound up. Really? The vast majority (if not all) will be forced into a capital loss they may not be able to utilise or in the case of ISA holders, will definitely not, at any time, be able to utilise. Would it not have been fairer to ask the holders what they wanted to do; stay or leave? Furthermore, if the non quoted portfolio had been separated but remained gated while the quoted component reopened, the mismatch of liquidity would have been solved automatically.
One wonders whether Link ultimately viewed the situation as an embarrassment and wished it had never heard of Woodford in the same way that Harrogate Borough Council probably wished it had never heard of the UCI 2019 World Cycling Championships. Link did mention other options were considered but were not exactly forthcoming about why they described them as not being in the interests of investors or viable.
We all make mistakes but it is difficult not to conclude this shabby tale results from too many individuals/organisations being beguiled by the reputation of an individual assumed to be infallible. To believe that if Woodford’s doing it, it will all be OK, is naïve beyond belief. History shows us the ‘impossible’ happens more frequently than people might think. The Titanic sank, Leicester City won the Premier League and on a solitary occasion, Prince Andrew behaved like an intelligent human being. I acknowledge there’s debate over the latter but the first two definitely happened.
As a result of Link’s intervention, investors can now look forward to a stream of interim repayments over an indefinite period. Each one a potential entry on a tax return, along with the attendant costs. They will also have to pick up the vast majority of the extra costs involved. Who knows how long it will take to dispose of stakes in private businesses? Furthermore, there could be some worthwhile investments here but if they are now on the block, is that potential going to be reflected in the achieved price? Link director, Karl Midl, usefully pointed out that proceeds will be deemed part disposals for capital gains tax (CGT) purposes which may give rise to a CGT liability. It’s good to see he hasn’t lost his sense of humour.
John Newsome can be contacted on 01423 705123 or john.newsome@williams-im.com. Williams Investment Management LLP is authorised and regulated by the Financial Conduct Authority.
