A new book on the collapse of Woodford Investment Management has detailed the pivotal role played by Link Fund Solutions. Financial Times journalist OWEN WALKER, author of Built on a Lie, says that as Authorised Corporate Director for WIM, Link bears ultimate legal responsibility for what happened. But, in an extraordinary twist, Walker explains in the first of a two-part interview with Robin Powell how it was the UK regulator, the Financial Conduct Authority, which recommended that WIM should work with Link in the first place.
Owen, Link Fund Solutions was the Authorised Corporate Director for Woodford Investment Management. What exactly does that mean?
Until a couple of years ago, no-one outside of the investment industry, and very few people within it, had much of an idea of what an Authorised Corporate Director, or ACD, was. These are effectively the regulated fund manager. So, if you were to say, “Who was the fund manager of the Woodford Equity Income fund?,” it’s not Neil Woodford; he was the portfolio manager. From a regulatory perspective, the fund manager is Link, or, as they were at the outset, Capita.
It’s a fairly small sector of the industry — there are probably only a dozen or so ACD providers — and it’s very much an administrative service. They’re kind of outsourced regulators, if you will: they ensure the fund is run in a compliant way that fits with the regulations. It is their job to communicate with investors to make sure they understand what is going on within the fund, and essentially be that bit in between the portfolio manager (the investment company that employs them), the regulator, and the end investors. It’s a cog in the middle of that whole process, so it’s a very important part of the industry, even if very few people have much of an understanding of what it is they do.
So how did Woodford come to work with Link in the first place?
When Woodford was looking to launch his new business, he was still retained and employed by Invesco. So it was left to the three other founding partners to set the business up: that’s Craig Newman, who was the chief executive of Woodford Investment Management, the Chief of Compliance Gray Smith, and the Chief Operating Manager Neil Hamilton. The three of them put the business plan together and went to the FCA and said: “This is our business plan, this is what we want to do.” They had big ambitions for the business. Within three years they wanted to attract up to £17 billion of assets. So that would have catapulted them among the top ten investment managers in the UK.
At that time, the FCA had just decided it was going to fine Invesco for several funds, including ones managed by Neil Woodford, and yet it pushed this application through at record speed. The only point at which they pushed back on the application was over the choice of ACD. Originally, Craig Newman had wanted to go with another provider, but the regulator said, “No, you must use Capita (later Link),” and it’s a decision that really goes to the crux of everything that happened after that.
The FCA (and its predecessor, the FSA) was very much aware of Capita, which had been the ACD in two scandals where investors had lost tens of millions of pounds. One was Arch Cru, where 20,000 investors had unwittingly invested in things like fine wines and Greek shipping. The other was Connaught Funds, which blew up in the financial crisis and lost investors lost £118 million. In both instances, the regulator had said that Capita had been at fault. It had failed to carry out due diligence, and to communicate problems within the funds to investors. Step forward to 2021 and these are exactly the same issues at play here with the Woodford scandal, and who is the ACD? It’s Link — the same business, obviously with a name change. It just seems bizarre, looking back. Why was the FCA deciding that Link should play this role when they weren’t even the preferred choice? It’s my understanding that the FCA’s view was, “We’ve just investigated Capita for these two egregious failings on its watch. It’s going to be ultra-vigilant now, and it’s going to want to put Woodford through its paces and make sure he stays within the rules.” I think that reasoning was naïve at best.
That does seem extraordinary. And Craig Newman later commissioned a report on Link, which was very unflattering — yet still WIM didn’t change its ACD.
Yes, that was something Craig Newman did a few years into the business’ operation. Woodford Investment Management was starting to get a little bit concerned at Link, or at least there was lots of friction between WIM and Link. Newman was thinking, “Can we get better service elsewhere?” He commissioned a report from somebody who is very knowledgeable about the sector, and when it came back it basically said: “Here are the other providers, here’s what they do. Link is essentially a tick-box business; they go by whether something follows the rules to the letter and, if it does, great, we’ll give it the green light; and, if doesn’t, then not. They’re not able to make ad hoc decisions on challenging circumstances.” And the report suggested that other ACDs would have been better. Newman looked at that and thought, that’s fine, but actually Link were one of the cheapest in the market, and he decided to stick with them, and that’s probably a decision he’s regretted ever since.
So what exactly were Link’s failings in relation to Woodford?
I think there were multiple failings on Link’s part. Link was supposed to inform the FCA about what was going on and to warn investors about problems within the fund; it did neither. If you look at the asset swap of holdings between Woodford’s funds when he was trying to eke out a bit more liquidity in his main Equity Income fund, these things were talked about for months, and yet the FCA was not informed about this manoeuvre until the day it happened. Link was heavily involved in those discussions for months and should have been telling the FCA exactly what was going on; and this is after the FCA had been asking Link for monthly updates on the fund’s liquidity, which dated back to February 2018. So Link knew the FCA was interested in liquidity, yet it did not tell the FCA about what was going on, about these moves that were designed to increase liquidity within the fund, until the very last minute.
It’s the same with the Guernsey listings. These were businesses, private companies within the Equity Income portfolio, that were asked to announce that they were going public and were going to list on the Guernsey Stock Exchange. By doing that, they could then be seen as public holdings rather than private holdings, which helped Woodford’s liquidity levels. Again, Link, which actually sanctioned these listings, did not inform the regulator. The FCA found out about those following press reports and, as Andrew Bailey has talked about to the Treasury Select committee, this was not something they felt was the correct course of action. Link certainly should have kept them up to date with what was going on there.
Of course, Link was heavily criticised at the time for the part it played in the suspension of the Equity Income fund in June 2019.
Yes, the decision had been made the Friday before by Kent’s Pension Fund that they were going to withdraw £263 million from Equity Income. But the crucial point was that they were looking for a staged withdrawal. They knew that their holding was worth about seven per cent of the entire Equity Income Fund and, if they took it out all in one go, it was likely to trigger a suspension.
So the council’s finance officer was in contact with Woodford on the afternoon of that Friday and said, “Look, we’ve made a decision to pull out and you’ll get an official request for this on Monday, but we’re going to ask for a staged withdrawal, which will take place over several weeks, giving you time to readjust the portfolio.” Woodford then spent the weekend with his advisers and in contact with Link, talking about how they would make that work.
On the Monday morning, Kent’s finance officer was off on holiday and his stand-in was a bit proactive and sent a note to Link. He wasn’t aware of the discussions on Friday, and said, “We want out £263million back now please, thanks very much.” And Link, having been involved in those discussions over the previous 48 hours, just said, “OK,” put the request back in to Woodford, and said, “We’ll have to suspend the fund.”
It just seems incredible, given how much they knew about Woodford’s liquidity problems, and after the discussions that had taken place over the weekend, that they didn’t go back to Kent and say, “This is the situation. If you are to ask for this money all in one go, the fund will be suspended, you won’t get your money back straight away, you might be waiting around for months, or even years to get it back. Why don’t we talk about a staged withdrawal?”
If you look at some of the documentation that Link has around the fund prospectuses for Equity Income, and also its own internal policies, it says that when there is a situation when a fund can be threatened by large withdrawals, Link should consider offering either a staged withdrawal or an in specie withdrawal, which is when a collection of the assets are transferred back rather than cash. Link didn’t do that, so it was kind of going against its own rules.
I put these failings down to the fact that Link was completely the wrong business to look after Woodford. WIM was a complex company. It was small at launch, but it grew rapidly and it had intentions to be big. It was well known Woodford was interested in things like unquoted companies, and his funds had been looked at closely by regulators in the past. He was a complex client, which Link should never have been assigned to. They’re very much a tick-box group, who are just not very good at adapting to tricky situations and, ultimately, it was the regulator who threw them together.
Do you think Neil Woodford could have turned things round eventually had he been given the chance?
It’s very hard to know, but Woodford had been in this situation for two years by this point. It wasn’t as if this was a short period of illiquidity when investors were taking their money out. He had been facing this near-death rollercoaster ride since the summer of 2017. This was the direction of travel that he had been on. He was the portfolio manager. Had he been managing the portfolio correctly, he would have been adjusting and reducing his commitment to unquoted companies and his large stakes in small quoted companies years before the eventual collapse. So I think Woodford had been given a long time to sort this out and, if anything, it was getting worse. So I don’t necessarily buy the argument that Woodford would have turned it around. But I can see that if someone had invested in Woodford over several years, certainly in his prior career at Invesco Perpetual, and been provided with healthy returns, they may see things differently.
When the issue of compensation for Woodford investors was first discussed, the focus was very much on Woodford himself and on Hargreaves Lansdown. That focus has largely shifted to Link. Why do you think that is?
I think that’s just the dynamics of the market and the regulations. There are lots of people who are guilty of playing a role in this scandal and acted in ways that most of us would think, “Well, they shouldn’t have been doing that.” However if you look at the regulations, and the way that the industry has been set up, the ultimate role for ensuring the fund is running in a legally compliant way and a way that protects investors, that role belongs to the ACD.
Should Hargreaves have been heavily promoting Woodford’s funds in the final 18 months? Having it on its best-buy list? Retaining it on its best-buy list in the final six months? The fact that the likes of Mark Dampier and Lee Guardhouse at Hargreaves Lansdown had concerns about Woodford’s high commitment to unquoted companies since the beginning of 2018, in the final 18 months of the business — that does not look good. Mark Dampier and Lee Guardhouse’s sale of shares of about more than £6million in the final days before the suspension of Equity Income — that doesn’t look good. But I don’t think Hargreaves is an easy target from a legal perspective. Woodford himself? Yes, he did all sorts of manoeuvres that don’t look good when you look at them in the cold light of day. His personal sale of £1million of shares in his investment trusts in the final days don’t look good.
But ultimately, the legal responsibility for much of this lies on the ACD’s shoulders, not the portfolio manager. That’s how the rules are set up.
ROBIN POWELL is editor of The Evidence-Based Investor.
The original interview has been slightly edited for brevity and clarity.
Built on a Lie by Owen Walker is published by Penguin Books.
Did you invest with Neil Woodford?
The law firm Harcus Parker is bringing a collective action against Link Fund Solutions on behalf of Woodford investors.
If you hold, or have held, shares in the LF Equity Income Fund (formerly the LF Woodford Equity Income Fund) (the ‘Woodford Fund’) either directly, through an intermediary or in your SIPP, you may be entitled to claim for compensation.
To find out more, go to WoodfordClaim.com. You can join the claim by filling in your details.
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The Evidence-Based Investor is running a campaign called #JusticeForWoodfordInvestors. We’re going to be keeping investors abreast of the latest developments and explaining what their options are. To follow the campaign, search for the hashtag #JusticeForWoodfordInvestors on Twitter, Facebook or LinkedIn.
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