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Holly's Blog: Watching as a brand burns

7 June, 2019

This week we’ve watched the very public burning of one of investment's most retail of brands. The Woodford Equity Income fund, a leading UK fund which was once the potatoes of many “Mum and Dad” investors’ meals, has been seriously burnt.

Woodford's assets have shrunk by over £3 billion this week alone as institutional clients have retreated from the reputational blaze, and investors are inflamed as their money is locked away for at least a month.

Let’s take a look at precisely what went wrong and also check in on Hargreaves Lansdown, the UK’s major investment broker, which has had its fingers burned as collateral damage.

What happened with this fund?

Fund managers have a style. They typically either like trendy cool stuff which is going gangbusters (‘growth’) or they like cheap stuff which is out of favour (‘value’) which they think is underpriced and will bounce back.

Neil Woodford is a value investor, but right now this is like being a manufacturer of flared jeans in the 1990s. Skinny jeans are in fashion and no-one likes flares.

He owns lots of domestic UK stocks in sectors like construction – so has missed out on all the global Viagra and the razzmatazz of tech stocks. Brexit has certainly played its part in prolonging the lack of appetite for these stocks and sectors. This malaise is certainly not just a problem for Woodford, and most UK value managers are having an annus horribilis.

How can you say when a fund is categorically bad?

We should think over at least a 5-year timeframe – but I know that’s easier said than done when funds like Woodford’s are down about 18% this year, whilst global growth darlings and the Lindsell Train/Fundsmith-type stories keep on dancing.

The thing is that no-one knows what the future holds. I have no doubt that flares will come back into vogue. I’m fairly sure that many of the stocks Woodford holds will have their day as Apple / Amazon / Alibaba face future battles. But here’s the rub – I don’t know if that will be in one year. Three years. Or five years. And no-one does.

If it’s one year this could be a phoenix from the ashes story. If it’s five years, we’ll all agree that was too long and a failure.

Why has the fund been suspended?

The fund has had a bit of a “cashflow-type” crisis. Lots of people read the accelerating bad headlines and started to sell. Now if all of Woodford’s shares were FTSE100 shares, he would just sell these, get the proceeds and in turn, pay people out. Easy peasy.

The problem is that he had crept away from the aforementioned potatoes and added some more exotic illiquid investments to the mix. (Jerusalem artichokes if I murder the analogy). These are not easy to sell and - here's the rub - if he’s forced to rush and sellers know he is vulnerable / needs cash pronto, they will try and shaft him and offer cheeky prices, or monkey about with complex short-selling ,which basically helps vultures to profit from his vulnerability. Being a very public forced seller is always bad news and would hurt his investors.

If he temporarily closes the doors, he can re-jig things, move some of the less liquid holdings into shares which can be easily sold – and then re-open for business, be much less vulnerable and pay out withdrawal requests.

Woodford held too much in illiquid assets, did some cute positioning which was most probably within the letter but not the spirit of the law, and got himself into this bind. Lots of blame games are starting with regulators and politicians now, despite this position being pretty public since March.

Have I lost my money?

No! This is super important. It doesn’t mean you have lost your money. The car’s still in the garage but the doors are temporarily locked.

A fund is just a container with lots of shares in it. The top share in Woodford’s fund is Barratt Development. When the fund was suspended on Monday, this share was trading at £5.50. It’s £5.58 as I write. If everything behaved like this, the notional price of the fund would in fact be higher today than when it was suspended. The fund is still being priced daily whilst suspended and today’s price is pretty much bang on what it was on Monday this week.

Will I still pay him a fee whist the fund is suspended?

Yes. Although the boss lady at the Treasury Select Committee has said this is not OK, and this will certainly turn up the heat. I felt more sympathy for his cause until I read he was not going to waive his fee. A poor judgement I think. This is one number he can control this week.

How long will this last?

The fund’s powers-that-be will formally review the suspension every 28 days – I suspect the suspension will probably be more than this. It depends how long it takes to shift some of the illiquid stuff in a measured way.

Why is Hargreaves Lansdown getting bad press?

Hargreaves is like a department store. It carried Woodford’s funds on the shelves and promoted the fund as one of its top 50 picks. The research team stuck with the fund as its performance suffered and other competitor brokers dropped it.

The platform did promote the fund and many investors will have picked it because of this. This is where the jury is out. Prior to suspension the Fat Lady had certainly not sung, although she’d been warming up in the wings.

Performance had been bad. Yes.

Did retail investors in a very vanilla sector understand that they owned? Probably not. Whose fault is this? Debatable.

Was it a write-off? Not at all.

Could it still come good? Yes.

Did Hargreaves do anything wrong?

The reports that Hargreaves had some specific commercial incentive to promote Woodford, or were somehow on the take, are frankly a load of cojones. The platform gets its admin fee on any funds we own. Unlike department stores, they effectively charge us a 0.45% fee to ‘shop’ with them and then negotiate the lowest costs possible on the products they stock. They are agnostic to the funds we pick. Their massive klout means they could negotiate a lower fee for their clients on the Woodford fund. Most competitor platforms didn’t get this discount, which rankled.

Was the firm naïve about the accelerating impact of increasing poor press? Yes.

On the defensive because of their contrarian stance – so too keen to make their case rather than communicate more about what lay under the bonnet? Probably.

Have they been truly long-term investors not afraid to take a contrarian view or simply bad decision makers? Too early to say.

On the take? No.

As an aside, I also think it fair to observe that Hargreaves has been helping investors to diversify and to identify good funds and investments for nearly 40 years.

Survival of the fittest

Yesterday it felt to me as though someone with a clinical view and hell-bent on damage control, blazed into Hargreaves, smartly suspended its admin fee on the Woodford fund, and loudly called for him to do the same with his management fee, successfully diverting attention back to Woodford. Joining the other large brands which have kicked him under the bus and retreated.

The takeout?

As I sit on the sidelines and watch a brand burn, I’ve seen a fair bit of spineless behavior. I-told-you-so experts who just three years ago were singing Woodford’s praises. The know-it-alls pouring oil on the flames without the humility to acknowledge hindsight. Some firms joyfully scratching their keys down a big competitor’s car.

The primary lesson from this unhappy circus is diversification. But I suspect that the lesson that some average Joes might take is never to go near the investment industry. I think the press, other financial firms and financial commentators need to take that risk more seriously in their comments and behaviour.

I shall get off my soapbox now. Time to turn to my next worry, which is 40 children pitching up for a party tomorrow and the forecast is rain. Thank God for Sauvignon blanc.

I shall get off my soapbox now.

Time to turn to my next worry which is 40 children pitching up for a party tomorrow and the forecast is rain. Thank God for sauvignon blanc.