InvestmentsJun 19 2019

Hargreaves Lansdown worried about Woodford for 18 months

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Hargreaves Lansdown worried about Woodford for 18 months

Hargreaves Lansdown started putting pressure on Neil Woodford to change tack with his stricken Equity Income fund 18 months ago, according to the platform's chief executive Chris Hill.

Mr Woodford’s £3.75bn fund was suspended on June 3 over liquidity concerns, following outflows of £9m every working day in May. The fund had lost 20 per cent over the past year.

Nicky Morgan, chairwoman of the Treasury select committee, wrote to Mr Hill on June 11 with several questions about the process for compiling the firm's buylist, which the fund was on, and the discount received by Hargreaves clients who bought the fund.

In his response to Ms Morgan's letter Mr Hill wrote: "In November 2017, as part of our regular analysis, we identified an increase in the proportion of these small and unquoted assets in the Woodford Equity Income fund.

"We met with the fund manager that month and urged him to address the issue. The manager committed to us that he would make no new investments into unquoted businesses from that point."

He said Hargreaves also recommended the fund manager reduced the early warning thresholds for his investments in unquoted companies, which he agreed to do.

He wrote: "We insisted that they abide by the Ucits guidelines not to breach the 10 per cent level and to inform us immediately if they did, to which they also agreed.

"We have subsequently, on 18th June 2019 in FCA chair Andrew Bailey’s response to the Treasury select committee, found out that Woodford twice breached this limit in February and March 2018. They did not inform us of this on either occasion."

The FCA published Mr Bailey's letter to Ms Morgan yesterday. In this the regulator stated it had started supervising the fund more closely from February last year regarding issues related to liquidity.

Mr Hill told Ms Morgan: "At this point [November 2017] we insisted on more regular meetings to track how Woodford would be managing the portfolio shift.

"Our judgement was that our discussions would result in actions that would lead to him restructuring the portfolio and better relative returns over the longer term."

He said Hargreaves had communicated an increase in the proportion of small and unquoted stocks to its clients in December 2017.

In January 2018 it initiated monthly communications with Woodford Investment Management specifically addressing the unquoted stocks in the portfolio, either via a call or email.

Through 2018 it continued to meet with the manager. At each of these meetings, he said, the platform questioned the manager on the levels of unquoted stocks in the portfolio.

"We also asked for details on how he planned to reduce these positions."

Hargreaves Lansdown maintained Mr Woodford’s Equity Income fund on its Wealth 50 buylist right up until the day it was suspended on June 3, despite an extended period of poor performance from the fund, which was the absolute worst performer in the IA UK All Companies sector over the three years prior to its suspension, and lost  20 per cent in the year before.

It was included in the revised Wealth 50 list in January 2019, while funds such as Jupiter European, and Fundsmith Equity, which were top performers in their respective sectors, were not on the list.

Hargreaves Lansdown clients pay an annual management fee of 0.5 per cent for investing in the fund, which is cheaper than the 0.75 per cent paid by most other clients.

This makes owning the fund cheaper on the Hargreaves Lansdown platform, despite the platform charge of 0.45 per cent being more expensive than some others.  

This discount comes as Hargreaves clients are able to buy a Z share class of the fund, which is cheaper than the other share classes.

In order for a platform to be able to offer this share class to its clients, it must be confident its clients can place £500m into the fund, which is a hurdle few other platforms could meet, and so most others could only offer the Woodford Equity Income fund at full price.   

Mr Hill said the links between his firm and Woodford Investment Management have not been detrimental to clients, and that he believes the fund was on the buylist for reasons not solely related to the cheaper fee.

There have been calls for best buy lists to be investigated and regulated although such lists do not constitute financial advice.

But Mr Hill wrote to Ms Morgan: "In order for best buy lists to help savers make investment decisions, it is crucial that they are rigorously and fairly constructed, that this process is backed up by appropriate oversight and governance, and that there is no commercial conflict of interest between the ‘best buy’ list / model portfolio provider and their clients.

"In terms of fee income, Hargreaves Lansdown is paid directly by our clients, not by the fund managers.

"Our fee income is calculated as a percentage of the clients’ assets held on our platform, and we earn the same fee regardless of the funds our clients hold.

"If they select a good fund manager and their assets grow more quickly, we end up earning more; this means our interests are aligned with our clients."

He said Hargreaves Lansdown uses the combined buying power of its 1m plus clients to get the lowest cost it can for each fund, meaning all other things being equal, this delivers better investment returns for its clients.

The average reduction to the standard annual management charge negotiated by Hargreaves Lansdown for actively managed funds on the Wealth 50 list is 30 per cent, he said.

He added: "In 2018, our clients saved over £61m on their fund management costs as a result of the terms negotiated on their behalf."

Hargreaves clients have £1bn invested in the Equity Income fund.

Following the suspension, Hargreaves waived its platform charge for affected clients and called on Mr Woodford to do the same. But to date Mr Woodford has declined to follow suit.

david.thorpe@ft.com