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Holly's Blog: Woodford - a financial morality play

18 Oct, 2019

The one-time poster boy of investors and media darling Woodford has been dealt the final blow this week, closing down his firm as the powers-that-be in charge of his Woodford Equity Income fund gave him the boot.

The one-time poster boy of investors and media darling Woodford has been dealt the final blow this week, closing down his firm as the powers-that-be in charge of his Woodford Equity Income fund gave him the boot. It’s an awful outcome with no upside. A financial boil that’s been lanced, and my supposition is that the regulator was firmly at one end of this needle. “This is ugly and bad. Make it go away. Quickly.”

There are lots of know-it-alls dancing on graves this week. I’m not going to do this. I’m going to take a slightly contrarian view, despite the fact that I’m personally looking at paper losses of about £6,000 from the Woodford Patient Capital Trust. And I know that many of you have lost money in this horrible mess. So let’s be very clear. Right now Mr Woodford is not my favourite person. However (deep breath)…

Arrogance and pride… or simply the uncertainty of life?

Investments are not cash. No-one has a crystal ball. Humans make errors of judgement.
Any investor needs to accept this. The only defence we have is diversification and the placing of investment eggs in different baskets.

Neither do we want our active fund managers to be so scared of potential backlash that they just slavishly copy everyone else – we want them to make decisions, informed choices, and to root out the winners. We also want online investment providers to help filter out the noise, to sift through the 1000s of funds out there and to tell us which are their preferred choices and why. If we slate anyone who makes a bad call, we will eradicate any appetite to go against the herd as ‘Health and Safety’ continues to go mad.

I genuinely find the negative comments about Hargreaves Lansdown a little over-done. In hindsight they were naïve to continue to back a Vindaloo which was positioned as a Korma. They helped to create an enormous monster and were too hesitant to end their support when the unquoted portion got too big and Woodford did not act fast enough to correct this. (I have no doubt that he arrogantly believed that no-one would ever sell and so this would not be a problem.)

So did Hargreaves muck up? Yip. But this is not the first time that fund analysts have made a bad call and it won’t be the last. As I look at the soul-destroying red numbers on my app against the Patient Capital Trust, to be fair, I also see the corresponding green numbers against Lindsell Train Global Equity and First State Global Listed Infrastructure, for example, which are both up by about 100% since Hargreaves first brought these funds to my attention several years ago. Overall, I am better off because of their fund research and the discounts that they have negotiated. But they have serious lessons to learn from this and one of the first is how to talk to their customers in a less clinical, cold way – and how to openly and succinctly communicate their research process and criteria. Naïve? Yes. Dodgy? No.

Folly? Can we categorically rule that this was indeed a poor fund?

There’s another argument in town. Woodford ran a ‘Value’ fund. Value has been spanked over recent years as ‘Growth’ has gone gangbusters. Growth is all about potential, and “what might be” – Apple, Facebook, Google and exciting sexy feelgood stories. Boring old value (where kinda boring companies make decent boring profits from making boring things you understand ) has been hugely out of favour. So have UK companies which make most of their money from domestic sources. Woodford liked value and he liked the UK – in recent times, the investment equivalent of wearing flared jeans in the 80s.

In a bitter cruel irony, just this week, as Boris waggles his deal, 2 of Woodford’s main holdings (Barrett and Taylor Wimpey) were up 11% and 14% respectively – UK domestic stocks staged a rally. The decision to give him the boot at this juncture will be questioned. Sod’s law is that this fund will have its best week in years next week, just as the administrators are selling down to cash which would be an extremely bitter pill to swallow indeed. At some point over the next few years, we will almost inevitably see a time where Woodford’s fund would have been top-of-the-pops. Somewhere, some journalist will write an article on how Woodford would have been the best fund manager on a performance basis, had he only been left alone by the press, the politicians and the regulator, to do his thing.

Lust and vice – or just lack of flexibility?

The problem is that this fund strayed from its stated intentions, and held too much in unquoted shares which are hard to sell. This – not performance – is the crime for which Woodford should be tried. It’s a bigger problem than just Woodford and today there are other mainstream fund manager brands which are perilously close to breaching the rules, who will be having some pretty terse conversations with compliance right now. If everyone rushes for the door at once, they won’t all be able to get out.

This is not just because fund managers are cavalier. Let’s say that £95 is held in quoted – stuff you can easily buy and sell – and £5 is unquoted. Then we get Brexit doom and gloom and everyone wants flash growth tech stocks and markets suffer and the quoted stuff is suddenly only worth £75. And the unquoted stuff is actually doing better. Suddenly your holdings of unquoted stuff – as a proportion of the whole – are too high without you having changed anything. Not something you can correct overnight.

Greed and redemption

Enough of this rational, contrarian view. Like most, I feel a bit sick as I watch what can frankly be described as a sh*t-show. There was too much spice stirred into this Equity Income fund. There was rule-bending going on and arrogance in spades. God only knows what Link, the fund’s authorised corporate director was doing. Adding insult to injury is fact that Woodford and CEO Newman paid themselves nearly £100 million in dividends over the 5 years of the firm. That is so extreme as to be gross.

Even despite all of this, I’m quite a soft touch for a sincere apology. If there had been more of a sense of genuine remorse and regret, and a suspension of fees whilst the fund was in lockdown, I might feel differently. I challenge Mr Woodford to think about what he does with the £65 million he took out of the business as dividends. £50 million would fund a breath-taking financial literacy program for all British school children. Fund a tech program to sort out shabby financial communications to help avoid this sort of mess. Or indeed enable some of those early stage pharma businesses which you love, to help improve people’s lives. And still leave a lazy £15 million to play with!? You alone have the power to find some good out of this ugly mess.

How much might I get back?

It’s important to stress that investors have not lost all their money. For someone who bought a unit in the Equity Income Fund at £1 at launch in 2014, this is worth 85p in the fund today. About 2/3 is held in easy-to-sell shares and 1/3 of assets might take 6 months to 1 year to sell, according to an April report by the regulator. I suspect with all the activity behind the scenes that the hard-to-sell stuff has got proportionately less. There will also be fees and charges to bear in the wind up. So I would guess that of this 85p today, people might expect to get roughly 50p back in January and maybe another 25p back over the year. But I’m slightly in the dark here because the shutters are down and visibility is low, so please don’t take this as gospel. We’ll doubtless hear more over coming weeks.

Over and out, have a good weekend.


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