The Evidence-Based Investor

Tag Archive: When the Fund Stops

1. The uncanny parallels between Neil Woodford and Bill Gross

   March 29, 2021 6:51 pm Comments Off on The uncanny parallels between Neil Woodford and Bill Gross

    

    

   One was American, the other a Brit. One was a bond investor; the other made his name picking blue-chip stocks. But both Bill Gross and Neil Woodford fell out with their employers, set up on their own and suffered spectacularly falls from grace.

   Financial Times journalist OWEN WALKER has reported on both stories. In the second part of a two-part interview with Robin Powell, he discusses the parallels between the two. He also warns that the UK investing industry could be involved in a similar scandal if the lessons from the Woodford fiasco are not properly heeded. 

    

   Owen, your book Built on a Lie is one of two books published so far about the Neil Woodford saga. The other, When the Fund Stops, was written by a friend of yours, David Ricketts. How do the two books differ?

   It’s a very strange situation. David is one of my closest friends. We went to university and journalism school together, and we started at the Financial Times Group at a similar sort of time. We would, in normal times, meet up for coffee or lunch at least once a month, but we didn’t last year, because of the pandemic, so we ended up working on very similar projects, unbeknown to each other!

   The principal difference is that David’s book looks at Woodford the man, the human story. My book is about the broader picture and what happens when three-quarters of Brits hand over their retirement savings, their ISAs and their rainy day funds to financial advisers and to investment managers.

   I think the Woodford story is probably the most egregious example of what can go wrong. But it’s not just about Woodford: there are several things that went wrong at the same time.

    

   This isn’t the first time you’ve reported on a “star” fund manager’s fall from grace, is it?

   That’s right. I worked for three years in New York covering the investment industry there, and there’s a very interesting US parallel, which is Bill Gross. He was known as the “bond king”, the world’s best-known bond investor, the professional gambler who co-founded Pimco and became one of the most recognisable investors in the world. His Total Return Fund reached about $300 billion of assets. 

   When I was in New York, Gross fell out spectacularly with Pimco and left and joined a much smaller operation called Janus. He was given his own office and his own staff to work with. It was very similar to Woodford’s exit from Invesco Perpetual. 

   In fact, the parallels between Gross and Woodford are fascinating. Gross set up on his own, his performance sank spectacularly, and investors left at a rate of knots. And I ended up covering the eventual closure of his fund to investors in 2019. It was a very ignominious end to his career. He was very much like Woodford, a contrarian, who was always wheeled out to talk about big investment themes, and was very much the face of Pimco in the same way that Woodford was the face of Perpetual. 

   Strangely, Gross also had some high-profile spats with his neighbours, and there are stories about Woodford falling out with Jeremy Paxman and Nigel Starmer-Smith. It was such a similar story!

    

   Of course, it’s easy to be wise after the event. But as you explain in your book, there were warning signs while Woodford was still at Invesco Perpetual that he was keen to invest in small, illiquid stocks — and willing to push the rules to the limit.

   Absolutely. Woodford was obviously very well-known for being an investor in FTSE 100 blue-chip companies, yet his first foray into bio-scientific investments goes back to the late ‘90s. But because these were very small positions in terms of the overall pot, they went completely under the radar.

   By 2012, the FCA realised that a number of Invesco funds — not just Woodford’s — had been investing in assets that were putting their investors’ money at higher risk than they had been led to believe. In Woodford’s case, the funds he was managing had been investing in complex derivatives, and this hadn’t really been explained to the people whose money he was managing. 

   The FCA carried out its investigation into Invesco at around the time that Woodford  told his bosses that he wanted to leave. The FCA told Invesco it was going to fine them about £25 million, which would have been the record for a fine for a UK investment business at the time. Invesco managed to negotiate that down to £18.6million, which was still a record.

   So Woodford certainly wasn’t the only fund manager at Invesco doing interesting things with their portfolios that the FCA was noticing, but he was very much within their investigation.

    

   Woodford recently announced that he’s planning to make a comeback. What’s your opinion on that?

   It’s crazy, actually. I’ve been working on this book for over a year now, and as we came close to publication day at the start of March, I was starting to wonder whether anyone was still interested in this story. And then, lo and behold, two weeks before the book comes out, Neil Woodford gives an interview to the Sunday Telegraph saying: “I’m sorry. I’ve cried a little bit about this, but I’m back. I’m starting a new business, and it’s going to be based in Jersey.”

   Well, what’s the first thing that journalists do when they hear something like that? They call up the Jersey regulators and say, “What’s going on here?” And it turns out that the Jersey regulator hadn’t actually received an application from Woodford to start a new business up. In the days that followed, the Jersey regulator came out with a statement saying it quite inappropriate for somebody to talk about launching a business without even putting an application in.

   The FCA has come under renewed attack over its handling of the affair, and particularly over the delay to its investigation into it. For Woodford to carry on, he will certainly need to be signed off by one or both of those regulators, and they’re both coming under a lot of pressure not to give him permission. 

   If you’re an investor in Woodford’s fund, if you’re nursing losses, this isn’t a good look. Also, the fact that Woodford has been advising Acacia Research,  this US investment business which bought up all these bio-tech companies at rock-bottom prices from Woodford’s portfolio and flipped several of them, making a very tidy profit — that just looks awful. 

    

   Finally, what lessons can be learned from this saga? And could we see something similar in the future?

   The first lesson is that liquidity is a key problem. Now, liquidity problems have been a feature of the investment industry for decades, if not centuries. If you look at some of the other big blow-ups — Long-Term Capital Management in the 1990s for example — they were largely about liquidity. These things come back to haunt us. We think we’ve remembered the lessons of the last crisis, but they come back again. 

   Overvaluations were another problem. There was lots of hype around some of the companies Woodford was investing in. That problem goes back to tulip mania and the South Sea Bubble, and we’ve seen it again this year with GameStop. 

   Another issue is that we have an investment industry that fails to connect the dots. As I explain in the book, the Woodford case is one where lots of people failed to do what they were supposed to do and that was what led to this turn of events. Woodford could not have happened if the regulator had been on the ball and picked up the signals earlier. It would not have happened if Link Fund Solutions (Woodford’s Authorised Corporate Director) had been more proactive and flexible in the way it dealt with Woodford and its investors. 

   Woodford would not have happened either if the fund had not been pumped up by intermediaries, by the likes of Hargreaves Lansdown, and by the financial press.

   So there were lots of factors that went into the Woodford story. It’s not solely about Woodford himself. I hope this is a one-off, but if we’re talking in ten years about the next one, I wouldn’t be surprised.

    

   ROBIN POWELL is editor of The Evidence-Based Investor. 

   The original interview has been slightly edited for brevity and clarity. If you missed Part 1 of this interview you can catch up here.

    

   Built on a Lie by Owen Walker is published by Penguin Books.

    

    

    

   WOODFORD INVESTOR?

   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.

    

   FOLLOW THE CAMPAIGN

   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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   © The Evidence-Based Investor MMXXI

    

    

    

2. Could the Woodford blow-up have been prevented?

   January 23, 2021 6:30 am Comments Off on Could the Woodford blow-up have been prevented?

    

   A new book on the Neil Woodford scandal is about to be published. Opinions are divided on exactly what went wrong, but the book, When the Fund Stops, provides some helpful clues.

   In Part 1 of his interview with Robin Powell, the book’s author, DAVID RICKETTS, explained how the large number of illiquid stocks in Woodford’s funds eventually proved his undoing. 

   In Part 2, Ricketts discusses the role played by third parties including Hargreaves Lansdown, and the company responsible for overseeing the funds, Link Fund Solutions. Could they have prevented the funds’ collapse?

    

   David, in your book you describe Hargreaves Lansdown as Neil Woodford’s “loudest cheerleader”. How big a part do you think they played in this saga?

   They undeniably helped to create a buzz around Neil Woodford, particularly around the time that his fund was launched. 

   Hargreaves Lansdown had this agreement with Woodford which meant they would be the cheapest venue for people to invest in his Equity Income fund. Some of the promotional material around the fund launch certainly gave the impression that Woodford was the best thing since sliced bread. 

   There was a lot of promotion around Woodford the fund manager, and the brand of Woodford, and we had the likes of Peter Hargreaves, one of the co-founders of Hargreaves Lansdown, saying that he would invest his own personal wealth in Woodford’s fund.

   Speaking to people who formerly worked at Hargreaves, what they said to me was that this was one of the biggest promotional drives, or marketing campaigns, they’d ever seen. The listing of Royal Mail several years earlier was another big promotion for Hargreaves Lansdown, but the Woodford campaign blew that out of the water. They threw absolutely everything at it. 

   The fact that the Woodford Equity Income fund was also included on their buy list — the Wealth 150, as it was known at the time — also helped generate a lot of interest. 

   Speaking to investors who went into Woodford’s fund, you can probably say with some certainty that they were drawn in by some of the marketing. The Wealth 150 list is Hargreaves’ list of preferred funds, backed by what they say is a rigorous research process. If you’re a DIY investor with Hargreaves, trying to whittle down thousands of funds to a select few, you’re reliant on these buy lists to a certain extent.

    

   In the book you quote a former Hargreaves staffer who suggests there was a lack of “belt and braces” analysis around Woodford, despite all the money that people were investing. That’s quite worrying, isn’t it?

   There was an expectation from a lot of people who worked at Hargreaves Lansdown that Woodford would simply continue his run of success from Invesco and just move that track record across. It goes back to the fact that the focus was too much on Woodford the fund manager, and not his new fund.

   I suppose one could argue that Hargreaves saw he had a proven track record over 20 years. He wasn’t a young upstart. But the fund wasn’t given the same level of scrutiny as perhaps other new fund launches would have been. It may have been just a case of going through the motions. 

   What did become clear in my research for the book was that Hargreaves did start to ask questions about some of the illiquid holdings, certainly as the fund was reaching its suspension. 

   But I think the question is, why were those questions not being asked earlier on? And while those questions were being asked, why was that fund still on the Wealth 150 list, or the Wealth 50 list as it was later called?

    

   As authorised corporate director, Link Fund Solutions had a responsibility to investors to ensure their money was being sensibly invested and that they could take their money out if they wanted to. It appears that Link failed investors on both of those counts.

   This is another interesting element of the whole story. Link, as you say, was  the authorised corporate director. It sounds like a very unglamorous and unsexy role, but it’s a crucial role in the world of financial management. They have a responsibility to ensure that the fund manager is fulfilling its duties, and treating investors fairly, and that the fund is sticking to the rules. 

   One of the key triggers for the suspension was the fact that one of Woodford’s largest clients, Kent County Council’s pension fund, took the decision that they wanted their entire investment back, which at the time I think was roughly £250million. That was a huge sum of money to pull from a fund in one go. 

   In the run-up to the fund being suspended in June 2019, conversations were taking place between Link and Woodford about what would happen to the fund if Kent County Council were to redeem that holding. Could the fund continue continue in the way that it was? What would the liquidity profile look like? Could the fund offer Kent a managed redemption, so rather than pulling the whole holding in one go, could it be staged over several months to enable the fund to continue operating so it wouldn’t be such a blow to other investors? 

   So a lot of conversations were taking place behind the scenes, and from speaking to people who worked with Woodford at the time, that decision by Link to suspend the fund was a surprise to them. From what I’ve been told, the idea of the fund’s suspension wasn’t mentioned in conversation right up to the weekend before that. So the suspension was always a possibility but I think it wasn’t a measure that Woodford was expecting.

   Link has come in for a lot of scrutiny over how the suspension was handled, and obviously they are now responsible for offloading the assets that are left in the fund, and a lot of questions have been raised about that. Have these assets been sold off at fire-sale prices? Could a better price have been negotiated for some of these assets? The whole process of paying back investors from that fund has certainly come in for scrutiny as well.

    

   What about the Financial Conduct Authority? Should it have seen this coming and asked more questions earlier on? Did the FCA let investors down?

   We’re still waiting to hear from the FCA about the findings of the investigation that they launched into the events leading up to the fund suspension. So far they have failed to provide any indication of what this investigation might include or when it will be published.

   But the FCA certainly gave the impression that they failed to act on some of the red flags as soon as they should have done. The fact that they only became aware of Woodford’s decision to list some of the unquoted assets in the Equity Income fund on the Guernsey Stock Exchange after reading press reports — that didn’t go down well at all with the Treasury Committee and Nicky Morgan, who was the chair of the committee at the time. 

   It emerged shortly after the Equity Income fund was suspended that the Guernsey exchange had tried to contact the FCA a couple of months previously to discuss the concerns it had over the valuation of some of these unquoted assets, But a detailed discussion didn’t take place between the two sides until the fund was actually suspended. There were various reasons for that, one of them being that the communication was picked up by a junior member of staff at the regulator. So the FCA haven’t exactly covered themselves in glory.

   Most recently, there have been two reports published looking at failures at the FCA. One was how they oversaw the collapse of a quant fund in 2012, which left over 1200 investors nursing losses of more than £100million. The report concluded that the FCA could have acted in a more effective way to protect investors in that fund. 

   Another report looked at the FCA’s role in the collapse of London Capital & Finance in 2019. Again, the report uncovered serious failings about how the FCA regulated this entity, which included a failure to act on some allegations that were made by third parties. 

   What I think will be interesting is to watch what comes next, both from the FCA, but also from politicians, (on Woodford). Certainly the impression that one got from the Treasury Committee was that the FCA were asleep at the wheel.

    

   Do you think that regulators, politicians, journalists and so on have learned from the Woodford scandal? Has it changed opinions about the “star manager” culture? Or will we see a similar episode in the future?

   I think lessons have been learned, to some extent. The star manager culture that existed during Neil Woodford’s heyday is certainly on the way out. The focus on one individual is certainly being played down. When you speak to investment management firms now, they talk about the process of having a team in place. Nobody wants a fund manager holding all the assets and suddenly announcing a departure, and then the money goes out the door with them. That’s a key risk to any business.

   To their credit, Hargreaves Lansdown have certainly overhauled their own internal processes when it comes to their buy list. The Wealth 50 list has now been called the Wealth Shortlist, and that has an improved risk monitoring process, which looks more closely at liquidity. 

   Interestingly, one of the things that came out when I was doing research on the book is that they actually focus a bit more attention now on the media profile of fund managers. Perhaps one of the things that caught people off-guard was the fact that the coverage that Woodford had probably exacerbated the problems for him. When these companies that he was investing in announced profit warnings, there was lots of attention given to Woodford and his investment process, and I think a lot of investors did get spooked by that coverage and pulled money as a result of reading stuff in the newspapers. 

   Could this happen again? Until we get a firm answer from the FCA about any firm action it might take, it’s hard to say. But there are certainly still people in the fund management sector who are on a pedestal and are seen as “star performers”.

    

   ROBIN POWELL is editor of The Evidence-Based Investor. 

   The original interview has been slightly edited for brevity and clarity.

    

   When the Fund Stops by David Ricketts is due for release by Harriman House on 26th January.

    

   WOODFORD INVESTOR?

   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.

    

   FOLLOW THE CAMPAIGN

   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.

    

   © The Evidence-BasedInvestor MMXXI

    

3. Woodford: Was the writing on the wall at Invesco?

   January 16, 2021 6:30 am Comments Off on Woodford: Was the writing on the wall at Invesco?

    

    

   A new book on the Neil Woodford scandal is about to be published. When the Fund Stops by journalist DAVID RICKETTS charts the rise and fall of a fund manager who was once described as “Britain’s Warren Buffett”.

   In Part 1 of this interview with Robin Powell, Ricketts recalls the years he spent writing about Woodford, and the dramatic collapse of his investment empire in the summer of 2019. 

   He also explains how Woodford’s performance deteriorated the more he invested in early-stage companies but how the warning signs were missed. 

    

   RP: David, you’ve covered hundreds of stories as a financial journalist over the years. How does the Woodford scandal that began in June 2019 compare to other stories you’ve worked on?

   DR: This has to be one of the most exciting and probably one of the most shocking stories that I’ve worked on.

   The departure of Neil Woodford from Invesco in 2014 was itself a very big news. I remember speaking to financial advisers at the time who said this was the biggest story of the decade. 

   The initial excitement about him setting up his own firm got a lot of interest and the coverage around that was immense.

   But you’re right, the crunch came in June 2019 with the announcement that the Equity Income fund, Woodford’s one-time flagship fund, which at its peak  managed more than £10billion of assets, was being suspended. The assets had dwindled to round about £3billion, but it was a big shock to everyone. 

    

   Of course, Neil Woodford had delivered very good returns over two decades at Invesco. How highly was he regarded as a fund manager?

   He was a very well-known fund manager. He kind of had this “rock star” status, if you like. At Invesco he really did have a reputation of being infallible. 

   The period when he made a real name for himself was in the run-up to the tech bubble bursting. He was one of the few fund managers who refused to pile into tech stocks when all those around him were doing so. He refused to follow the herd. He was somebody who invested in traditional stocks, particularly tobacco stocks, and he remained loyal to those stocks during the late ‘90s. When the tech bubble burst he was vindicated. 

   He was also one of the few fund managers who didn’t hold any banks in the run-up to the financial crisis, and it was thanks to that that he became a sort of poster boy of the UK fund management industry. He really was seen as somebody who was head and shoulders above the rest.

    

   So the question is, how did Woodford go from hero to zero? In your book you suggest that the seeds of his eventual failure were sown at Invesco, because it was there that he started investing in early-stage companies.

   That’s right. It was in his latter years at Invesco that he started to venture into some of these less liquid, smaller companies that aren’t necessarily listed on the stock exchange. He spotted an opportunity; he thought these companies would offer higher potential for growth.

   Towards the end of his career at Invesco there was a change in management as well. A new Chief Investment Officer was brought in. They began to ask more questions about Woodford’s investment process. An investment committee was set up to oversee, or keep a check on, some of the investments that he was making, and that committee was directly reporting to the CIO.

   So Woodford became aware that he was being asked more questions about his investment process. Perhaps he wasn’t used to that level of scrutiny. He was used to being given free rein to invest in companies that he thought would deliver the best returns. 

   I think he started to feel that maybe he would be better off outside of a big organisation where there were so many hoops to jump through and questions being asked. I think the sense was that, maybe if he struck out on his own, he could make a lot more of these decisions himself — and justify his decisions — if it was just him and his immediate compliance team.

    

   It was also around that time that the Financial Conduct Authority started to take an interest in what Woodford and his colleagues was doing, wasn’t it?

   Yes, there was an FCA fine that was handed down to Invesco, and it was announced just a month before Woodford was due to launch the Woodford Equity Income fund.

   The FCA found that about 15 Invesco funds — including Woodford’s High Income and Income funds — exposed investors to higher levels of risk than they were led to expect.

   There’s nothing wrong with investing in companies that aren’t listed — there are lots of fund managers who do that — and there are European rules governing funds called UCITS that do permit managers to invest in unquoted companies. But there is a threshold that needs to be met; you can’t exceed ten per cent of the fund’s assets.

   So the issue that became more apparent as Woodford moved into his new venture was, were investors fully aware of the extent to which he was doing this? 

    

   Yes, Woodford’s exposure to early-stage firms grew considerably at Woodford Investment Management, didn’t it?

   That’s right, and I think that’s one of the reasons that Woodford came unstuck.

   It’s really fascinating when you look into the outflows and the kind of proportion of the portfolio that the unlisted companies made up towards the end. There was a huge exposure to unlisted companies at that stage, because he was having to sell down the holdings in more liquid companies to meet redemption requests. 

   So you’re right, Woodford had started straying into these unlisted companies with Invesco, but at that stage it wasn’t a concern. Even with the launch of the Equity Income Fund in 2014, there were a few unlisted companies in the portfolio, but nothing to the extent to which he ended up with four or five years later.

    

   The book is very balanced, and the picture you paint is of a decent man with ordinary human failings. He could be quite hot-headed, for example.

   One of the great things about writing a book is that you can really get into the fine detail. Speaking to former colleagues, he had this “star” status; I suppose you could call it “ego” as well. 

   That comes through with some of the meetings he had with chief executives of the companies he invested in. He would often summon them to Invesco’s Henley office, because he had that status. He was such a powerful investor. Normally you’d expect fund managers to go the offices of the companies they invest in, but it kind of worked the other way round.

   I spoke to a few people who said he would occasionally lose his temper, not necessarily with his colleagues but with the general frustrations of the companies he was investing in. Having a glass office meant that all of this emotion was on public display. 

   People said that you had to choose the right moment to approach him if you had a query about something because you didn’t want to get on the wrong side of him unnecessarily.

    

   ROBIN POWELL is editor of The Evidence-Based Investor. 

   The original interview has been slightly edited for brevity and clarity.

   In Part 2, David Ricketts talks about the role played by different parties in the unravelling of Woodford Investment Management. These include Link Fund Solutions, which had a fiduciary responsibility to protect the interests of Woodford’s investors, and the investment platform Hargreaves Lansdown, which is described in the book as Woodford’s loudest cheerleader.

   When the Fund Stops by David Ricketts, is due for release by Harriman House on 26th January.

    

   WOODFORD INVESTOR?

   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.

    

   FOLLOW THE CAMPAIGN

   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.

    

   © The Evidence-Based Investor MMXXI

    

    

4. Four reasons why another Woodford scandal will happen

   January 14, 2021 6:30 am Comments Off on Four reasons why another Woodford scandal will happen

    

   By ROBIN POWELL

   This article was originally written for the Suitable Advice Institute.

    

   The Woodford scandal is one of the bleakest chapters in the history of the investing industry. In the spring of 2017, Neil Woodford was still being fêted as a star money manager. The investment company that bore his name managed more than £15 billion. But two years late his Woodford’s flagship fund was suspended and within months Woodford Investment Management (WIM) collapsed.

   Today hundreds of thousands of investors who had money invested with Woodford are still waiting to find out the full extent of the damage — and when, if ever, they might be compensated.

   But a bigger and more important question is whether such a scandal will happen again. The answer, as things stand, is almost certainly Yes, and there are four main reasons why.

    

   1. The pressure to outperform

   More than anything, it was Woodford’s predilection for unlisted or illiquid companies that proved his undoing. He made his name backing large, safe companies, but he came a cropper trying to identify small up-and-coming ones, which of course are very much riskier. 

   One by one, firms like Allied Minds, Provident Financial, AA Group Prothena, Circassia, Capita and Purple Bricks delivered bad news, eventually stretching the patience of Woodford’s larger investors to breaking point.

   Why have traditional fund managers like WIM and H2O increasingly been straying into areas normally dominated by private equity funds and venture capital firms? Because that’s that where their best chance of adding value lies. 

   Generating alpha in the public equity space is now extremely difficult. With early-stage companies, which are far less researched, and whose valuation is often largely a matter of personal opinion, it’s easier to outperform, or at least to give the impression that you’re doing so.

   With the pressure on fund managers to outperform growing as the outflows from active to passive funds continue to swell, the temptation to focus on unlisted and illiquid stocks will only become greater.

    

   2. Our need for heroes

   The Woodford scandal has at least made people question the wisdom of using so-called star fund managers. But most investors — and alas many advisers and journalists — still want to believe in them. 

   Irrational though it is, such behaviour is far from unusual. Everyone loves a hero, but this “halo effect” is especially important when choosing someone to manage our life savings. As the psychologist Philip Tetlock once said, “we need to believe we live in a predictable, controllable world, so we turn to authoritative-sounding people who promise to satisfy that need.”

   The investing industry understands this well. That’s why fund management companies spend a fortune every year perpetuating the star manager culture through PR and advertising. It’s also why the platforms and brokers love their lists of “best-buy” funds. Woodford is the most heavily promoted British stockpicker of all time.

   Unless and until human nature changes, investors will always be attracted to personalities like Woodford, who appear to have a good record, a compelling narrative and the courage of their convictions.

    

   3. Underfunded pensions

   When we think of investing, we tend to think of retail investors, but institutional investing is far bigger, and, for fund managers, far more lucrative. No wonder Neil Woodford spent so much time courting large investors such as pension funds.

   Fortunately for active managers with the right track record, the attraction is mutual. Why? Because pension funds are desperate for some outperformance. As people live longer, pensions need to fund retirements lasting many decades. At the same time, trustees face the challenge of eking out decent returns in an era of negative interest rates.

   Some of Woodford’s biggest investors were pension funds. Kent County Council, for example, whose request to withdraw its money led to the Equity Income fund’s suspension, at one stage had £317 million invested with him.

   In a new book on Woodford, When the Fund Stops by David Ricketts, pension fund expert John Ralfe says: “The corporate governance within the local government pension scheme is is absolutely dreadful. The people usually in charge of making decisions haven’t got a clue, and like the idea of having money to play with. But they are reliant on advisers.”

   And why are investment consultants so keen on managers like Woodford? Because most have built their value proposition on their ability to spot winning funds, even though the evidence says that all they are doing most of the time is simply recommending funds that have outperformed in the past.

   As Warren Buffett once explained, “no consultant in the world is going to tell you, ‘Just buy an index fund and sit for the next 50 years’.”

    

   4. Insufficient regulation

   The best hope for averting another Woodford scandal is tighter financial regulation. 

   After its consultation on illiquid assets two years years ago, the Financial Conduct Authority did help to improve awareness of the problem. But it has so far failed to address the issue of illiquid assets in UCITS funds, or the inappropriateness of open-ended funds as an investment vehicle for illiquid assets.

   Perhaps we will see some progress at some stage, but the chances of that happening imminently are slim. After all, we’re still awaiting the outcome of the FCA’a official inquiry into the Woodford scandal. 

   Interviewed by the BBC shortly after the Equity Income fund was suspended in June 2019, by Lord Myners, the former fund management executive and City Minister, said: 

   “The FCA… look like the people in white suits in Line of Duty, the scene-of-crime inspectors who arrive after the damage has been done and did not anticipate what was happening.

   “The regulator will give itself two years to carry out a review of what went wrong, and the same risks will continue of allowing illiquid assets to be put in portfolios that are treated as if they are liquid.”

   Sadly, little has happened in the 19 months that have elapsed since Lord Myners made those comments to suggest his predictions were wide of the mark.

    

   Only a matter of time

   For all of those reasons then, it seems only a matter of time before we see another disastrous episode in the UK fund industry like the Woodford scandal.

   The frustrating thing is that we do learn lessons when things go wrong eventually — but nowhere nearly fast enough.

    

   WOODFORD INVESTOR?

   The Evidence-Based Investor is joining forces with the London-based law firm Harcus Parker to try to win compensation for as many Woodford investors as possible.

   Harcus Parker will shortly be lodging a collective claim against Link Fund Solutions, which was responsible for overseeing Woodford’s funds. 

   We are neither lawyers nor financial advisers, but we do believe that the case against Link is robust, and that this action has a good chance of succeeding. 

   If you would like find out more about joining the claim, go to WoodfordClaim.com.