WOODFORD, WHO IS TO BLAME?

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The sorry saga of Woodford rolls on, with even more damming headlines from our media accusing others of wrong doing and placing the blame at the feet of certain individuals. Smarter people than me will no doubt get to the bottom of this fiasco but, I would like to add my pennyworth to the debate.

First off, this is not down to a single person but a systemic breakdown in the relationship between investors, investment managers, advisers and, most importantly, the people behind the oversight and administration of the assets held in the Fund. We all know the background to the launch of Woodford; an excellent record of managing money at Perpetual and latterly Invesco after the takeover of Perpetual in 2000. His track record seems to speak for itself but, then again, does it?

Over the years he has, on many occasions, invested into the smaller cap/private equity space and Investors have done very well out of it that exposure. Many research houses have given him a clean bill of health and, in many cases, over the years he has won industry awards, accolades and glowing reviews from journalists. That was then, this is now –journalists today are calling for a public hanging of the guy and anyone associated with him.

The sorry saga of Woodford rolls on, with even more damming headlines from our media accusing others of wrong doing and placing the blame at the feet of certain individuals. Smarter people than me will no doubt get to the bottom of this fiasco but, I would like to add my pennyworth to the debate.

First off, this is not down to a single person but a systemic breakdown in the relationship between investors, investment managers, advisers and, most importantly, the people behind the oversight and administration of the assets held in the Fund. We all know the background to the launch of Woodford; an excellent record of managing money at Perpetual and latterly Invesco after the takeover of Perpetual in 2000. His track record seems to speak for itself but, then again, does it?

Over the years he has, on many occasions, invested into the smaller cap/private equity space and Investors have done very well out of it that exposure. Many research houses have given him a clean bill of health and, in many cases, over the years he has won industry awards, accolades and glowing reviews from journalists. That was then, this is now –journalists today are calling for a public hanging of the guy and anyone associated with him.

His style has always been as an activist and this has won him plaudits as well as great investment returns. So those who have invested with him before should be familiar with his style, approach and more importantly the timescales he works to. In the 30 years he has been running money this ‘approach’ hasn’t changed but what has changed is he now works in a bubble at his own company. It’s a company that has his name over the door and, whilst I am not doubting regulatory controls, I would suggest Neil would be one hell of a boss to cross and challenge. No doubt his style was never questioned by anyone and yet that isn’t the real issue here. The working environment would have been very different from the checks and balances he would have got at Invesco and with a boss like Bob Yerbury who would have controlled his individualist approach.

However, saying all this, my main problem isn’t with Woodford, but the role played by the ACD.

All ACDs and Management Companies (ManCos) have an obligation to work on behalf of investors, it is their duty to protect them by ensuring the rules are adhered to and the Fund does what is set out in the prospectus and other supporting documentation. The name Authorised Corporate Director says exactly what it is obliged to do. Direct and be authorised to do so. The role of the ACD is not one that should be taken lightly. Within all ACDs a thorough and challenging culture should be endemic at all times with its ‘Independence’ being key. It is all too easy to look at the revenue stream (and in the case of Woodford’s £10bn, that would have been rather nice) and forget the job is to push back against Fund Managers who might sail too close to the wind. Independence of Boards is vital if we are to ensure that Managers behave and stick to the plan.

In reality the ACD has the right to replace the Manager if they believe they haven’t done as set out in the documentation and risk breaching regulatory obligations. In this instance whilst Woodford did nothing ‘illegal’ I would question what ACD allows a Manager to interpret a liquidity position as putting in liquid SPVs with illiquid assets. Bonkers! There is the law, the interpretation of the law and then there is taking the proverbial Michael.

 

Turning to the role of Fund Boards. We have come a long way over the years with iNEDs becoming part and parcel of the framework in places like Dublin, but it is only this year that are we seeing iNEDs becoming part of the furniture on Fund Boards in the UK. Even then, there is only the need for 2 iNEDs and they can be a minority on that Board – no independent chair for example. I appreciate Fund Management businesses want to control/own the Fund but let’s remember investors are the ultimate owners. Their money makes up the Fund and so the fees associated with running the Fund are a consequence and need to be earnt. As Asset Managers we have an obligation to manage the Fund as set out in the prospectus and promoted in the marketing collateral. If we fail to do our job, then who fires us? Ultimately the investors walk with their feet but what if it is too late and there is a car crash of epic proportions as we have seen with Woodford? Does the Manager get fired? If he owns the Fund, would they fire themselves? NO but maybe they should.

 

Turning to the Distributors, the Wealth Managers, the DFMs and the IFAs who bought the Fund. There should be no blame here. Their due diligence should have picked up the illiquid issue but if they were happy with that, then fine as long as that was articulated to investors and made clear in all documentation. Was it? Certain individuals have been pilloried by the Press for making money out of their businesses. Shock horror! What business owner doesn’t want to do that? They benefitted from a successful business model. Hargreaves Lansdown in particular has been chastised by many.

Mark Dampier and Lee Gardhouse are in charge of the Fund selection aspects of HL and have over the years supported many Managers successfully and, more importantly, guided investors to the better performing funds over the long term. Due to its to scale, as with any commercial deal, they have managed to negotiate a discount and gathered assets on the back of their very slick and effective marketing model. Why would they intentionally recommend a crXp fund? It’s not in their interest to do so, as they get a fee on AUM and as such the more successful they are then the more the fee. It’s called ad velarium fees and is used by most advisers and fund managers.

We all work in a very transparent industry and certainly since the Retail Distribution Review (RDR) the ability to take fees from Fund Managers has disappeared and yet some ill-informed journalists are stating that HL took a back-hander. Even Nicky Morgan MP who is the most ignorant of the lot has challenged the fee. I shake my head in disbelief at the stupidity of some people. HL clearly state they take no monies and rely on the ad velarium fee as every adviser/wealth manager does in the UK. So, nothing new here!

It’s understood HL were engaged with Woodford throughout the period the underperformance began occurring and ensured he took on board their concerns about liquidity. Woodford was reducing the illiquidity as a consequence, but the perfect storm took over and the rest is history. To have a personal attack on two individuals whose career has been exemplary over the years is an absolute travesty and borders on a pathetic witch hunt. So, congratulations to the journalists who applauded Woodford four years ago but now not only vilify him but also more aggressively at advisers for choosing the Fund.

As an industry we need to take stock of the situation and ensure we have strong corporate governance at all levels. In addition, it should be evidenced the controls are in place and not just as a ‘corporate’ tick a box. We should always remember who owns the assets, the investors and be respectful of that. Full transparency and openness are an absolute must and, to a certain extent, our industry has taken huge steps over the past 25 years but let’s not be complacent and pat ourselves on the back just yet… there is a lot more to be done.

Ok, we may not be perfect but surely, we’re not as bad as some commentators make out. Advisers, wealth managers and asset managers would be advised to listen to investors concerns and communicate loudly and clearly at all times. To hide in a crisis only allows the naysayers to control the agenda and ultimately the headlines. Our industry needs to stand up, be counted, take full responsibility and never EVER shy away from its responsibilities.

 

 

Have a great and hopefully dry weekend.

Regards

Stuart Alexander

CEO

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