FCA silence adds insult to injury as Woodford scandal hits three-year mark

Watchdog ‘can’t keep delaying this report indefinitely’

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If you thought the Sue Gray report into ‘Partygate’ was the yardstick to judge drawn-out investigations, investors burned by the Woodford Equity Income collapse would like to have a word.

Friday marks three years since Neil Woodford’s £3.7bn ($4.6bn, €4.3bn) flagship fund was suspended after Kent County Council tried to withdraw its £263m stake. The fund had been hammered by increasingly high redemptions, leaving it with a rising portion of illiquid assets.

Investors, many of who lost over half their initial investment, have only received a portion of their money back since the fund began winding down in October 2019.

Link, the fund’s authorised corporate director (ACD), has warned they could be waiting until 2023 before their cash is returned, as it struggles to sell the last of the fund’s holdings, which are mostly hard-to-trade biotech names.

Meanwhile, the FCA has still not concluded its investigation into the matter and has not held anyone to account.

Costly and lengthy process

Robin Powell, author and founder of The Evidence-Based Investor blog, says there is no excuse for the wind-up of the fund to be taking this long.

“It could have been handled far more quickly and efficiently than it has been. It’s very disappointing, too, that the process has cost so much money, which only adds insult to injury for investors. They’ve paid far too much in fees and charges already.”

He added: “It’s hugely disappointing that we’re still awaiting an official report from the FCA. Three years is more than enough time to come up with a report. The sad thing is that many Woodford investors were already in, or at least approaching, retirement. Some of them lost life-changing sums of money. It’s unclear whether they will ever be compensated. Indeed, some have already died.”

Ben Yearsley, co-founder of Fairview Investing, agrees there has been little progress but concedes there may be some mitigating circumstances. “Selling unquoted companies takes time, though I wish they had taken more time with the bulk of the portfolio, which in hindsight now seems a hasty decision.

“The other issue they are probably facing is the market has turned against high growth companies so the number of buyers is more limited.”

AJ Bell head of investment research Ryan Hughes says investors will doubtless feel Link and the FCA could have done better through this period. “There is a delicate balance between winding up the fund and getting a fair price for the remaining assets. After three years, I suspect many investors would prefer to draw a line under this, accept a lower price and move on.

“However, the furore that occurred when Link sold assets to Acacia Research for £224m – some of which were then quickly sold for huge profits – will no doubt have made them wary of accusations they’ve sold assets on the cheap”.

As to the investigation itself and interviews of witnesses, Yearsley said: “I imagine they are into the hundreds of thousands of pages of documents now. Covid clearly didn’t help with the whole work from home culture”.

Alan Miller, co-founder and chief investment officer of SCM Direct is far more critical of claims that covid was a factor in the lengthy – and ongoing – investigation process. “Zoom operated fine right through covid and Woodford is known for running a paperless office, so I don’t buy it that this was a justified reason for delay.”

FCA under fire

Is the FCA’s own failings in the saga – failing to act on numerous warnings about the liquidity of the fund – a reason for such scant progress?

“Quite possibly, yes” is Powell’s response. “The impression the FCA gives is that it wants people to forget about Woodford. Given that the FCA had handled things so badly from the outset, that’s no surprise. But it can’t keep on delaying this report indefinitely.”

Miller stresses that this is one of the largest industry scandals in living memory and that the response from the FCA so far has been nothing short of shameful.

“The disproportionate amount of illiquid stocks (30%) was evident in the first few years of the fund, not just at the end. The issue is not the rules, they have been there from the beginning, the problem was lack of proper oversight. When the fund breached the 10% rule, it should have been highlighted.”

Are best buy fund lists less trusted?

Powell suggests a positive to come out of the Woodford scandal is that there’s now less prominence given to best-buy fund lists. Investors are also less trusting of them.

“The Woodford Equity Income fund went straight onto the Hargreaves Lansdown list when it was launched and remained there until the fund was suspended. Hargreaves gave the impression that they were experts, and that they were monitoring the fund closely, but clearly neither of those things was true”.

He added: “Best-buy lists have always been about sales and marketing. Only a tiny fraction of funds beat the index in the long run on a cost and risk-adjusted basis, and outperformance is so consistent that picking the winners in advance is almost impossible.”

Miller is similarly unenthused by the best buy fund lists. “There is so much uniformity with these lists. They are not considered advice but appear that way.”

Lessons learned and reputational damage

According to Powell, the Woodford fund collapse was a rude awakening for the funds industry and, to an extent, lessons have been learned.

“There’s less emphasis now on star managers, and more focus on teamwork and succession planning. Fund management companies are realising that investors want to know what the plan is for when a manager leaves.”

He believes platforms and brokers are less inclined than they were to promote high-profile managers quite so brazenly. “There’s also more media attention given to the alternatives to traditional active management, though still not enough.”

Hughes insists the protracted affair has highlighted the total unsuitability of illiquid assets in open-ended, daily traded funds.

“Thankfully, one of the outcomes of these events is that other managers have removed such assets from their funds. Ripple effects have also reached the open-ended commercial property fund market, which could see fundamental changes to try and balance liquidity and accessibility”.

He concluded: “Ultimately, the fact that this saga has dragged on for so long has been damaging for the reputation of the whole industry. No doubt we will hear the familiar words ‘lessons will be learned’ once the final review is concluded by the FCA, but I suspect that will be of little comfort to the thousands of investors impacted and it will take a long time to regain the trust of these people.”

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