James Coney  

Counting the cost of the Woodford debacle

James Coney

James Coney

So confident were Neil Woodford’s team that the Equity Income fund was going to hit its target in December that a series of roadshows had been scheduled for November.

Advisers who hold more than £2bn of client money in Woodford had been invited.

I understand that very tentative enquiries had suggested that around £600m to £700m of this was likely to stay in the fund.

From elsewhere, Woodford’s team believed a further £300m would have remained.

This is not so incredible if you think about it, even given all that has happened.

Making sensible investment decisions is about judging what you think will happen in the future, not what has happened.

Clearly some thought the future looked brighter for the so-called Oracle of Oxford – until he closed Woodford Investment Management.

Ironically, for the first week or so after the closure, the Equity Income fund has performed very well, largely buoyed by the likelihood of a Brexit deal.

‘Don’t invest for the politics, invest for the economics,’ is an expression I am fond of.

In a way, this was where Mr Woodford was different from when he successfully bet against the banks before 2007 and tech stocks before 2000.

These were decisions based on fundamentals around the valuations of these sectors.

But taking a bet on Brexit as Mr Woodford did this time round was based on a series of political unknowns around trade tariffs, access to markets and regulations. Mr Woodford was never going to be able to call all of these things.

He may have been right, but we will never know now. Mr Woodford’s team would have found out by late November whether the fund would have been able to keep going. 

It was then that investors were to be asked what their intentions were on reopening.

They would have got a clue as to the level of redemptions and been able to manage outflows.

So it does remain a mystery (at least at the time of writing) as to why Link acted when it did to close the fund down.

Link blamed the slow sell-off of the unquoted stocks, but this was a process it was in charge of.

The over-riding lesson to be learned about the Woodford affair though is disclosure.

Many think that Woodford’s undoing was his total transparency over stock selection, which in turn allowed some to short his stocks. But that is not why they shorted them, they shorted them because they were rotten bets.

Actually, what investors need is more transparency in the form of better explanations about what is happening in a fund.

Had investors known that in February and March 2018 Mr Woodford had breached limits on unquoted stocks, or that the liquidity profile had worsened until April 2019, then perhaps many would not have lost so much money.