Woodford braces political storm as UK financial regulators scrutinize fund suspension
The shock of Neil Woodford’s decision to block withdrawals for his flagship fund is still rippling through the rest of his portfolio — and beyond. Under political pressure, UK financial regulators are now taking a hard look while investors continue to flee.
In a response letter to an MP, the Financial Conduct Authority revealed that it’s opened an investigation into the suspension following months of engagement with Link Fund Solutions, which technically delegated Woodford’s firm to manage its funds.
Earlier this month, investors were abruptly notified that they would not be allowed to redeem, sell, transfer or cancel their shares in the Woodford Equity Income Fund for at least 28 days. At that point, assets added up to £3.7 billion — down from £10.2 billion just two years ago due largely to an exodus of investors disappointed with the fund’s performance.
Andrew Bailey, FCA chief executive, shed some light on the final straw that forced Woodford’s hand:
During May 2019, net outflows (meaning redemptions were larger than subscriptions) averaged one per cent of [net asset value] per week. However, the redemption requests on 31st May and the 3rd June amounted to £296m, representing 8.2% of NAV, with the fund holding no cash at the time, having previously drawn down some of an overdraft facility. Funds are permitted to have access to overdraft facilities, to provide liquidity where necessary, but the value of the overdraft is restricted relative to the size of the fund. The redemptions on 31st May and 3rd June were very high and coincided with the repayment of the overdraft.
Woodford’s whole business is reeling. As much as the fund manager tried to stress that the suspension was limited to the Equity Fund, investors have pulled out of the Focus Fund (which is still open) and sent shares of the FTSE 250-listed Patient Capital Trust down more than 30%. Among the disenchanted was Hargreaves Lansdown — which has in the past sold and promoted the Woodford funds via its retail investment platform — pulling its entire position of £45 million from the Focus Fund.
On Tuesday Fidelity, another household name in personal investment, said it’s also banning clients from putting new money into the Focus Fund.
Woodford has made a slew of biotech investments, many of which have soured. They ranged from Circassia and Alkermes, both hit by setbacks in 2016, to ongoing troubles at now-penny stock biotech Northwest Biotherapeutics. More recently, Prothena owned up to utter failure in two late-stage tests of its lead drug, which was ultimately relegated to the scrap heap.
Central to the suspension debacle was the proportion of illiquid and/or unlisted assets in the Equity Fund portfolio, which made it harder to retrieve customers’ investments on demand. Bailey suggested that unlisted securities made up around 20% of the Equity Fund in February — almost double the required level — having breached that limit twice in 2018.
Meanwhile, Woodford has attracted the ire of Nicky Morgan, chair of the Parliamentary treasury committee, for still pocketing as much as £100,000 in total management fees from investors who were essentially trapped. Morgan has since issued inquiries to the FCA and Hargreaves Lansdown on their knowledge of the matter.
Bailey and Charles Randell, chairman of the FCA, are set to give evidence at a treasury committee meeting next week.
In a statement provided to the Financial Times, Woodford Investment Management said they’re cooperating with the investigation and insists the brief spikes in percentage of unlisted stock holdings did not constitute breaches.
“Woodford always provided month-end data for investors and at no time was there a month-end passive breach,” they said. “The FCA reference to breaches in February and March 2018 relates to two inadvertent intra-month passive breaches, both resolved before month-end.”