The Woodford scandal which has come to light in recent weeks, is a shocking abuse of trust. The Financial Conduct Authority in the UK was set up to protect the vulnerable, but it does not monitor ‘best buy lists’ on self-managed platforms which have become popular in recent years. By not monitoring these lists – they are open to abuse -funds would appear to be on the list chosen more by which charges the platform the least, rather than the best performers.
Neil Woodford was a star investor for 26 years at Perpetual (later Invesco Perpetual). By the early 2010’s working out of Henley upon Thames, Woodford was the best well known stock picker. In 2014, he left Invesco to set up his own investment management firm Woodford Investment Management and within months of setting up his firm had £5billion under management.
But investment management is an art not a science and not every fund manager gets it right every time ….
Woodford made his name at Invesco by selecting blue-chip companies that produced steady dividends such as pharmaceuticals and tobacco companies. Woodford was attracted to businesses which he felt were undervalued but yet resilient to withstand an economic downturn.
But he became bored with the safe and steady, he wanted to back winners, small science-based companies that could produce outstanding growth if he picked well. While at Invesco he wanted to launch a fund focusing on small, listed companies, similar to the Patient Capital investment trust – there is nothing wrong with this – but it is risky.
As every professional investment manager knows and is told by the Financial Conduct Authority – they must ‘know their client’ – does the client have the appetite for losses – while looking for winners – which is one of the benefits of engaging a professional investment manager.
At Woodford Investment Management Woodford set up a fund called Equity Income which was set up to mimic his most successful funds at Invesco – but as the money poured in during the first few years – he needed to find companies in which to invest and began writing big checks to poorly researched private companies.
Again, there is nothing particularly shocking in making poorly researched investments – this is another benefit of engaging a professional manager – their job is to weed out the funds whose investments are poorly managed.
However, in recent years investors are looking to save costs and invest themselves using self-managed investment platforms. 95% of the investors in Woodford’s funds were not professionally advised, they were self-advised investors using investment platforms.
Of the 95% of investors who were self-advised – 75% were using the UK’s most popular fund platform Hargreaves Lansdown which has over 1million users.
A large part of the attraction of the Hargreaves self-managed platform is its ‘best-buy list’ – and this is where the story is shocking – the best-buy list is expressed to be – as the name may suggest – the best investments in which to buy – but for whom – the investor or Hargreaves Landown? Best buys are not classed as financial advice or guidance – and so are not monitored in the same way as other professional advisers’ recommendations to their clients.
One of Woodford’s Funds was Equity Income. In 2018 it was down 17% and yet it remained on the list in 2019 despite the decision taken by Hargreaves to slim down its best buy list.
According to Owen Walker who has written a book on the Woodford affair ‘Built on a lie, the rise and fall of Neil Woodford, and the Fate of Middle England’s Money’, as part of the negotiations to stay on the list Woodford Investment Management agreed to reduce its fee to 0.5% while other funds on other platforms were charging 0.75%.
Owen goes on to say that several Hargreaves executives said they had reservations about Woodford’s investments as early as November 2017 but nevertheless the funds remained on its best buy list until the suspension of Equity Income 18 months later.
Charlotte Thorne founder and Director of CapGen and Podcast Professional Member of Caroline’s Club says “the number one learning from the Woodford Affair is that there is no such thing as a free lunch. If you are offered preferential rates by your investment platform you need to ask what they gain from promoting this fund to you. Paying for impartial advice will always be cheaper in the long run.”
Noel Craven Director of Quartet Investment and Podcast Professional Member of Caroline’s Club says “it’s telling that 95% of the remaining Woodford investors were self-advised. As member of a fund selection committee I know the warning bells around Woodford were ringing for at least 2 years before the closure of the business. Woodford’s open ended funds were all removed from approved lists in 2017 and all discretionary clients divested. There is merit in knowing, understanding and monitoring, it’s not always exciting but it’s what we professionals are paid to do.”
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