The shock closure of Neil Woodford’s fund and business should serve as a wake-up call for the industry.
On October 15, Link Fund Solutions, the authorised corporate director of the Woodford Equity Income fund, announced it had fired Mr Woodford and would be winding up the fund.
By the evening, Mr Woodford had resigned from his remaining two investment vehicles and announced Woodford Investment Management would close.
The star fund manager with the golden touch has fallen from grace, and investors are now facing a long wait for their investments to be returned.
Mr Woodford’s track record, which brought him fame while he was at Invesco Perpetual, was built on investing in large and mid-cap stocks with a smattering of illiquid unquoted investments on the side.
He had taken big sector bets against the herd and usually was proved right. An investor who placed £2,000 with Mr Woodford on his first day at Invesco Perpetual would have collected £24,000 by the time he left in 2014 to set up WIM.
But at his new company, he had a much greater percentage of the fund in mid, small and unquoted companies that were much less liquid.
As far back as July 2017, the Equity Income fund had started to underperform its peers and investors began pulling their money out. Outflows eventually reached a rate of £9m every working day, and on June 3 the fund was suspended.
By the time it closed, poor performance and outflows had shrunk the fund from £10bn in size to £3bn.
Many have blamed Mr Woodford for the closure.
Others have criticised investment platforms that recommended his funds and independent fund research companies as being complicit in the culture that encouraged his behaviour.
John Monaghan, head of research at Square Mile, says the company had been aware for some time that overall liquidity within the Equity Income fund had deteriorated and was monitoring the associated risk closely.
Square Mile suspended the fund’s rating altogether in April 2019.
Mr Monaghan says: “We had regular contact with WIM throughout to seek reassurances that the fund was being run following the same process and with the same objectives.
“Nonetheless, we were explicit in our concerns over the higher level of risk arising from this shift to more illiquid holdings and highlighted them in updates to the fund’s factsheets.”
The Woodford debacle is expected to bring about a change for advisers as well.
Carl Melvin, managing director of Affluent Financial Planning, says: “A lot of advisers may have relied on [Mr] Woodford’s pedigree from the past, rather than looking under the bonnet to find out what was going on.
“[This] is going to throw a light [on the fact] that if you are going to use active funds, you probably need to increase your level of due diligence and scrutiny in the fund.