The Woodford Affair and what it means for Investors
Posted by siteadmin on Monday 24th of June 2019.
We have been asked by a number of clients who have heard in national media about the Woodford Fund affair and its connection to retail investment platform provider, Hargreaves Lansdown. We thought it would be useful to explain a little of the background to the situation that has arisen, and explain how we operate and how this is quite different. It also worth mentioning from the outset that none of the portfolios our clients are invested in contain the Woodford funds.
After a highly successful career at Invesco Asset Management, Fund Manager Neil Woodford set up his own fund management business in 2014, taking with him many of his previous clients to this new company, Woodford Investment Management. He launched a series of investment funds called ‘the Woodford Funds’. The Woodford Equity Income Fund within the portfolio had 51 holdings, many in big dividend-paying names like BT and GlaxoSmithKline and, at first, it did well with a total return of 20% in its first year, versus 6.5% from the benchmark index FTSE All-Share.
However, since this initial success performance has deteriorated, with the fund underperforming in each of the last three years. This underperformance prompted investors to withdraw their cash and put it elsewhere. In February 2019, the Woodford Equity Fund had over £10bn invested in it. But since the run of redemptions the amount of money invested in Woodford Equity Income has reduced to less than £3bn. This has meant that Woodford Investment Management has had to sell holdings in order to meet investor redemptions.
It is harder to sell shares in unlisted companies quickly, which means the firm has had to sell down some of the portfolio’s larger, more liquid holdings. As a result, the portfolio has ended up being much more heavily weighted to smaller, riskier companies. At one point, the portfolio was more than 50% invested in FTSE 100 stocks; the proportion prior to June was less than 20%.
The firm placed a suspension on the fund to protect existing investors from the fund having to sell holdings at the wrong time in order to create enough liquidity for holders. Selling at the wrong time could exacerbate negative returns further which is wholly undesirable for all investors.
Hargreaves Lansdown involvement
Hargreaves Lansdown plc (HL) is a financial service company that sells funds and shares and related products to retail investors in the United Kingdom. This allows individual investors to manage their own portfolios. HL has been a large backer of Neil Woodford since the launch of this fund in 2014. In March 2019 HL DIY investors held in the region of £2bn of the total £10bn investment in the fund. The Fund has long featured on HL’s Wealth 150 favourite-fund list and, despite its consistent underperformance, was still included on their Wealth 50 list of preferred investments.
We cannot comment on how this list is constructed nor the potential internal conflicts of interest highlighted in the media, but what it does highlight are the risks associated with individuals building ‘DIY’ investment portfolios. It can be a cheap way of entering the investment market but carries with it the inherent risks of investing in a complicated marketplace without market insights and understanding or appreciation of whether the resulting portfolio is fit for an individual’s investment objectives.
The Financial Advice Centre investment approach
Researching and investing in funds is extremely complex and takes knowledge and time to complete. The process that is set up by our partner fund managers has been developed over numerous years and involves not only looking at a fund’s performance but how it reacts with other funds in portfolios. This is to make sure we fully understand how the fund should work in differing market conditions and an on-going and detailed evaluation to ensure the fund still fits the original investment criteria for our clients. We conduct rigorous, ongoing and regular checks of each client’s portfolio to ensure performance is in line with short, medium and long-term investment objectives.
At Financial Advice Centre Ltd, we are proud of our 20 year heritage of advising clients appropriately and retaining our fully independent status. We only work with top fund managers and meet with them regularly to ensure our clients’ portfolios meet our high standards of due diligence. Underpinning our success is our firm belief that a diverse blend of asset classes, spread across various geographical regions is a tried and tested path to long term success. This is particularly relevant in the difficult times we have seen in the market recently and should give our clients the peace of mind that we have their longer-term objectives in hand.
Help to those who have been affected by the Woodford Affair
When we see high profile issues such as this in the industry, it highlights the value and the benefit of clients being able to access proactive financial advice with appropriately qualified professionals monitoring your investments and goals on a regular basis.
This all takes time and expertise which again highlights how investing in funds and fund managers should be completed by professionals who have rigorous processes in place.
If you know of anyone who has been affected by the Woodford fund sell off, as an extension of our service to you, we would be happy to meet with them free of charge and provide our advice and insights.