12 Jun 2019
Every Tom, Dick and Harry has had a pop at Neil (yes, the villain has a first name) Woodford over the last few days. Countless rent-a-mouths have queued up to drizzle us with their schadenfreude (most know nothing about funds). But while they like to claim they saw it coming, they conveniently forgot to warn the rest of us.
I’m not going to bury Neil Woodford, but nor am I going to praise him. This unsavoury episode shines a spotlight onto the role of the expert fund selector and the extent to which investors were encouraged by experts and outright amateurs alike. These Gatekeepers’ professional standing needs to be gauged by their behaviour towards the Woodford funds at the outset and during the three years in which this debacle has unfolded.
A bit of history
In 2014 Neil Woodford’s Invesco Income fund had beaten the All-Share index 12 out of 15 years since the end of the 1990s. Woodford was a brand. The announcement of his new business inspired many disciples to follow, citing what appeared to be incontrovertible evidence of his skill. Others, however showed more objectivity — could he run a business while running a fund? Yes, we know Craig Newman was nominally in charge, but Woodford was the undisputed leader of the pack. Without the controls of a larger corporate culture – and a boss – would that feed his hubris and lead to errors in judgement?
Some organisations thought so – Parmenion for example erred on the side of caution, believing that new potential risks were worth evaluating in real time. They were few and far between — Woodford advised patience with his progress and some selectors exercised the same with their analysis. It’s worth noting that when we started the Gatekeepers database in Q315, about a year after launch, Woodford had 17 selections based on reputation only. 17!
In mid-January 2016, 18 months after launch, the Woodford Equity Income fund was 20% in profit, while the All-Share Index (and its passive pilot fish) had lost 5%. Anyone who’d bought at launch was deliriously happy. By June 2017, the fund had gained a 40% return over its three-year life, still a remarkable 15% ahead of the All-Share Index. The assets meanwhile had tripled to their zenith at £10.2bn. Some naysayers were beginning to feel uncomfortable with the missed opportunity and despite less than two years’ evidence, leapt onto the bandwagon.
After the referendum in 2016, the fund had wholesale changes made to it. Within six months the impact was being seen in performance, and yet few ‘gatekeepers’ struck the fund off their recommended lists. Woodford’s behaviour had changed, as had his domestic circumstances and staff turnover increased, particularly in the compliance department. And yet this seemed to go unnoticed by many of Woodford’s disciples, let alone set off any alarm bells.
In Q4 2017, 25 of the major fund selectors and recommended lists continued to feature Woodford Equity Income as a go-to fund. Morningstar, RSMR, Square Mile, BestInvest, AJ Bell among others lauded the fund. However, in the previous 12 months the fund had seen a major shift in focus. Unquoted holdings had risen and exposure to bombed-out stocks rose — this was a clear shift in the risk profile of the fund, where, it could be argued, Woodford’s valuation of unquoted stocks was ‘marking his own homework’.
For anyone experienced enough to have worked through the Morgan Grenfell affair in the mid 1990s, the echo of unquoted companies’ inclusion would have been unnerving. Over 12 months, while the fund’s sector had tracked the All Share index, the Woodford Equity Income was 15% adrift with no sign of abating. Yet as performance deteriorated, few, if any, selectors began to drop the fund until Q2 and Q3 2018.
At least one researcher noticed requests to meet Woodford were being stalled or referred to others in his team. Meetings that did take place were often robust. And yet the fund remained in favour; despite the focus on Hargreaves Lansdown, it has to be said that independent researchers like Morningstar and Square Mile didn’t drop the fund until Q1 2019, while at the time of writing RSMR bizarrely has the fund listed but ‘under review’, despite the gating.
Whether the fund has fallen through bad luck, serial hubris and mismanagement or otherwise, fund selectors bear a huge responsibility here. Were investment-naive customers ‘sold’ the fund without appropriate due diligence, ie simply buying a name or following the herd? At what point does the manager, or the advisers and researchers who recommended, promoted and validated the funds bear any responsibility?
RATING THE RATERS
There is an assumption that everyone puts a lot of research and effort into fund selection. Some do it very well while others appear to throw darts at newspaper listings. In the interests of fairness, it’s worth pointing out that the D2C cohort outperform other cohorts in our Gatekeepers analysis. And Hargreaves Lansdown is consistently top decile.
Gatekeeper performance has suffered as a result of this fund. Ever since we started the Gatekeepers analysis, we have said there is a serious case for the FCA to look closely at regulating fund selection and the production of recommended funds lists. The Woodford debacle has served to underline that need.