Published on: June 7, 2019

Happy Friday everyone and welcome to this week’s News, Views and Truths!

This week’s piece is centred on a well-known individual, although not significantly tanned and American.  So significant that the topic was raised on Jeremy Vine’s show on Radio 2; disgruntled from Surbiton rang in…

One of the UK’s most well-known, highly regarded and most invested fund managers, Neil Woodford, was forced to close his fund to clients this week, forcing investors, retail and professionals alike to sit and wait for their money.

With a decade-spanning career in UK equity investing, Neil is known for investing in big companies, paying big dividends.  This has tended to be the core element of many UK investors’ portfolios and his success in generating impressive returns resulted in him leaving Invesco Perpetual in 2014 to set up Woodford Asset Management.

And money followed.  Over £10bn to be precise.  Retail investors flocked to him, accessing the manager directly through the likes of Hargreaves Lansdown who made a huge song and dance about being able to offer the cheapest way into his funds.  St. James’s Place likewise secured a segregated mandate to invest their clients’ money under Mr Woodford’s guidance.  It was money for old rope.  Everyone wanted a piece and who could blame them?

(Apparently, all the trade journalists who are now gloating on recent events, but that’s another article…)

For the first few years, Woodford generated the expected returns from the expected source.  The funds were generating index and benchmark-beating returns, fuelling more and more clients (and the advisers of clients) to funnel money into the manager. This is, after all, a very well-researched, liquid, domestic equity market from which unknown risks were unheard of.

Although, it wasn’t.

Mr Woodford always had a penchant for smaller, innovative companies.  His base in Henley provided him with access to some of the brightest minds and, as a result, his huge amount of capital drew unlisted companies like a moth to a flame.  When you have £10bn, a few hundred thousand to roll the dice on a start-up is, well, pennies.  And as long as the core, UK large-cap dividend paying stock were doing well, everything is fine.

Until it isn’t.

Regular readers of this blog will know that the market is a funny old place.  Despite the belief of the greatest of managers, what you believe to be true is not always reflected in the share price.  Mr Woodford is a big believer in UK stocks that are attractively priced due to their reliance upon domestic earnings.  The market, however, really doesn’t like these and prefers the names that earn their profits overseas; Brexit and all that.

And as a result, the core of the portfolio has been losing money.  For a while.  And if that wasn’t keeping the investors happy, they walk.

When the performance from the expected turns so negative, the amount of redemptions begins to affect the underlying holdings and the ability to manage the portfolio.  When the portfolio falls from £10bn to £3.7bn, losing £560m in four weeks alone, everyone notices.  And everyone tries to head for the door.

This came to a head this week when Kent County Council asked for their £250m back.  Woodford closed the fund, on the basis that this would protect the value for the remaining shareholders.  The “gating” will be reviewed in 28 days, at which point Woodford Asset Management will review it.

Hargreaves Lansdown has removed the fund from their “Wealth 50” list of their best fund recommendations.  St James’s Place has terminated their £3.5bn mandate.

The inquest has now begun in earnest, with hindsight being the clear winner.  I am certainly not one to say “I told you so”; whether it was the intransigence of the investment process or the unlisted holdings, I would suggest it was a perfect storm that hit.  However, what I would advocate everyone to take away is the importance of what you own and why you own it.  Three Counties has not recommended the fund to any of our clients so there is no need to run off and grab a valuation to see if you are exposed; you aren’t.

I do sincerely hope that all parties exposed to this come out the other side and I have no doubt that there will be a resolution sooner rather than later.

And to finish, our usual playlist.  Have a great weekend and I shall hopefully see you all next week!

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