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.
“I think fund managers will have to be even more transparent. A failure to do so might lead advisers to say, ‘Unless we can really understand what is going on, we just won’t recommend it’.”
Fund analysis
Rick Eling, investment director at Quilter Financial Planning, says: “Fund analysis isn’t looking at track records or comparing funds to their peer groups. When I put a fund on our matrix, our restricted panel of approve funds, I am interested in what’s inside the fund today and what evidence do I have that that collection of holdings is right for my customer’s risk levels and objectives.”
“As an industry, let us wake up to the realities of fund analysis. It’s hard work.”
The events surrounding the closure of the Equity Income fund has also raised a number of key questions about levels of control and oversight and around liquidity, and particularly around unquoted holdings in open-ended funds and how big a fund a manager should run within a particular strategy.
Darius McDermott, managing director of Chelsea Financial Services, says: “What happened here was a failure to understand liquidity risk. And the failure to have sufficient risk controls. The ACD, in this case Link, is ultimately responsible for the fund.”
Fail to plan
Adrian Lowcock, head of personal investing at Willis Owen, says: “The unlisted element of the flagship fund was not an issue whilst the fund was growing in size, but it became a significant issue as the fund shrunk and the level of unlisted investments as a proportion of the whole rose quickly.
“There were no plans in place for this scenario and as such the fund and manager were always behind the problem and struggled to get on top of the issues.
“It is the responsibility of the senior management team of the investment company to make sure the fund manager follows the mandate, along with risk and compliance functions, to ensure these are kept within limits and regulations.”
FCA scrutiny
The role of ACDs is already under scrutiny from the Financial Conduct Authority as it was preparing for an investigation in the wake of the Equity Income fund suspension.
An ACD is an authorised person within a corporate body given powers and duties by the FCA to operate an open-ended investment company.
In an in-house or outsourced capacity, the ACD has a fiduciary role, and a regulatory obligation, to ensure that the fund is run in the best interests of the investors.
Link delegated the management of the assets within the fund to WIM.
But as WIM is not the authorised manager of the fund, Link remains accountable to the FCA and on the hook for the operation of the fund.
The value of the star fund manager and active management has also been brought into sharp focus.
Mr Lowcock says: “[Mr] Woodford was a very high profile fund manager and benefited from the support of large investment platforms, which meant the manager had a large inflow of money and a large retail investor basis.
“The boutique nature of the company and the lead manager’s name above the door clearly introduced risks that might not have existed elsewhere.”
Former pensions minister Ros Altmann says: “The lack of regulatory protection that has been highlighted in the Woodford case may well knock confidence in all active managers.”
The industry will be watching closely to see the FCA’s response, which itself has not been immune from criticism.
Baroness Altmann says: “There were clear warning signs in 2017 when Woodford moved illiquid holdings into an offshore quoted entity. [The] obvious red flag should have immediately generated a regulatory intervention.
“The FCA does not seem to have recognised the dangers to retail investors that were building up in the Woodford funds.”
The FCA is currently probing the fund suspension but will not investigate its own role in the debacle.
Michael Ruck, a lawyer at law firm TLT and an ex-FCA lawyer, says the regulator will likely look at whether individuals and corporates involved acted appropriately and in accordance with their regulatory obligations. It will likely look from Mr Woodford all the way down to advisers who advised individuals to invest in the fund.
Mr Ruck adds: “Do they identify any other fund managers that may find themselves in this similar position and therefore require further investigation or intervention from the FCA?”
The FCA declined to comment.
Ima Jackson-Obot is deputy features editor of Financial Adviser and FTAdviser.com
