Woodford – a lesson in hubris, both for individuals and councils

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The story of the Woodford Equity Income fund should give investors great pause for thought concerning how many eggs to put in one particular basket.

The Guardian reports:

The high profile career of investment manager Neil Woodford appears to be over after the one-time star stockpicker was fired from his flagship fund and quit as manager of his remaining two funds.

Woodford was sacked on Tuesday morning from his £3.1bn Equity Income fund, which will be wound up in an effort to return cash to investors more than four months after its shock suspension.

The move was a major embarrassment to the former City investment guru, once referred to as the “Oracle of Oxford”, and on Tuesday evening he stepped down from his Income Focus Fund and the Woodford Patient Capital investment trust.

Woodford said he was closing down his business, based at an Oxford business park, which he started in 2015 after earning his reputation over 25 years at Invesco Perpetual. His three-decade career as a high-profile money manager now looks over.

This is a stunning turnaround for one of the most successful “stock pickers”. Individual investors face anxious times as they wait to see how much of their money they get back from the administrators.

But perhaps of most interest to readers of this website is the situation of the Kent County Council pension fund. It invested £260 million in the Woodford Equity Income fund and this soared to £317 million in 2017. However, as the value of the stock fell earlier this year, its decision to try to withdraw its money led to the fund being frozen, leaving the pension fund (total value: £6.4 billion) in a bind. The pension fund now faces a wait to see how much of its money is recovered.

Charlie Simkins, chair of the Kent Superannuation Fund Committee, said:

It is disappointing that payments to investors will not now begin until January, rather than December.

However, the delay in recouping the Kent Pension Fund’s investment will not impact on the fund or its ability to pay members.

Citywire reported comments from Mark Carney, the Governor of the Bank of England on the ramifications of the Woodford episode:

He said there was a ‘consumer protection issue’ as investors believe putting money into an open-ended fund was ‘akin to a bank account where you can get money out at any time’.

‘We have seen with the Woodford case… and with certain real estate funds, that that which is liquid becomes illiquid very quickly and they cannot get their money out,’ said Carney.

* Paul Walter is a Liberal Democrat activist. He is one of the Liberal Democrat Voice team. He blogs at Liberal Burblings.

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4 Comments

  • William Fowler 16th Oct '19 - 2:01pm

    The underlying value of the funds are still there, that value may be more or less than investors put in. Woodford had a fantastic record before setting up his funds, which pulled huge sums of money in, to the extent that it became difficult to find suitable investments.

    Seems quite common for councils to have these huge sums to invest, sometimes borrowed money, in shares and property projects whilst at the same time not being able to balance their books. Seems something wrong there as they should be concentrating on providing services and improving efficiency rather than playing the stock market or commercial property projects, both of which are subject to business cycles that few in local government are able to comprehend.

  • William Fowler – The underlying value of the fund is NOT still there. Since the fund was gated back in June, its value has continued to tank (>13% value lost) as the administrators attempt to offload the unlisted and illiquid assets that had come to dominate the portfolio’s holdings. Further losses as they close down the fund should be expected as forced sales rarely realise the full underlying value.

    Woodford made his name picking quality mid-cap UK equities that had a track record of delivering strong and growing dividends. Had he stuck to this, i.e. what he was (and probably still is) good at, then entire debacle would’ve been avoided. However, instead he succumbed to hubris and decided that he now knew better than every other market player. They were all wrong and he was right. Contrarian strategies are all very well, however as Howard Marks of Oaktree Capital Management once said: “The problem with being too far ahead of your time, is that it is indistinguishable from being wrong.”

  • John.M – People need to understand that online platforms do not actually constitute ‘advice’, in sense of regulated financial activity. ‘Hot lists’ and ‘Top 50’ funds are not positive recommendations for investment. This is because real investment advice requires a detailed understanding of the client’s individual attitude to risk and capacity for loss. This cannot be achieved via drop-down menus and simplistic questionnaires. Diversification is key to managing risk, not only by asset class, sector and region, but also by strategy. Having all your eggs in one basket, relying upon a single investment manager’s judgement to be correct is a recipe for disaster from the start. At the end of the day, no one single investment manager can deliver a strategy that is right for everyone.

    Commissions for financial advisors have been banned since 2012 and I absolutely agree that ‘DIY investors’ should be made more aware that regardless of how prominently a fund supermarket or online platform promotes a certain fund, what they are getting is fundamentally an unadvised service. These are adverts, not advice. If they don’t understand the risks, then they should seek appropriate financial advice.

    **Disclosure – author is a professional financial advisor holding a Diploma in Regulated Financial Planning and the Chartered Financial Analyst designation. All opinions his own.

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