To quote the author of an excellent new book on the Neil Woodford scandal, “the cast of players in (his) spectacular rise and crashing fall is numerous and varied.”
As Owen Walker, whose book is due for release on 4th March, rightly says, the starring role goes to the eponymous anti-hero himself.
But was Woodford really the biggest culprit? Who, ultimately, should carry the can for what went wrong?
There are several candidates to choose from. Hargreaves Lansdown, has been rightly criticised for the way it promoted Woodford even when his funds were clearly in trouble.
But Hargreaves certainly wasn’t solely responsible for creating and perpetuating the Woodford myth. Platforms, brokers, national newspapers and investment magazines all contributed — as did Britain’s biggest financial advice chain, St James’s Place Wealth Management.
In recent days, the Financial Conduct Authority has borne the brunt of the ire arising from Woodford’s shock announcement in a Sunday newspaper that he intends to make a comeback.
20 months after Woodford’s flagship Equity Income fund was suspended, we still await the findings of the FCA’s investigation. Even when the report published, it won’t comment on the part played by the regulator itself in failing to prevent the fund’s implosion.
But while all of those organisations should share the blame for this sorry saga, the main offender was an organisation that has so far received relatively little media attention — Link Fund Solutions.
Link Fund Solutions was the Equity Income fund’s Authorised Corporate Director, or ACD. As such, it was legally accountable for the way the fund was run. It had a responsibility, not to Woodford Investment Management but to its investors, to ensure that the money in the fund was being sensibly invested and that, if they wanted to, investors could redeem their shares on request.
Link clearly failed on both counts. As everyone now knows, the fund’s portfolio contained far more early-stage companies than we had been led to believe. Consequently, as Woodford’s bets failed, one after the other, the fund developed a serious liquidity issue and was eventually unable to meet redemptions. Investors are still waiting to receive what’s left of their money.
does nothing to repair Link’s reputation. "Link allowed Woodford to breach regulatory limits,” Walker concludes in the final chapter.
“It failed to notice conflicts of interest over the valuation process of unquoted companies. Once Link took more control over pricing these businesses, their values soared then plunged, revealing a chaotic and poorly planned system. The results were devastating for the liquidity levels of Woodford's portfolios.
“Link's failure to keep the regulator in the loop on the Guernsey listings and Patient Capital asset swap appeared sloppy at best. Though Link was not formally required to inform the FCA, the creative ploys were warning signs Woodford's fund was in trouble and which the regulator should have been made aware of.”
The book is also highly critical of Link’s handling of the Equity Income fund’s suspension in June 2019. “The company's process-driven approach,” Walker writes, “meant it suspended (he fund) without trying to reach a compromise first.
“(Woodford’s business partner Craig) Newman had long suspected that Link was not up to the job and in 2017 commissioned some research into the sector to assess what other providers could offer.
“The report was scathing about Link's proficiency and suggested several other companies could do a better job. But Newman chose to stick with Link, not least because its fees were among the lowest in the market. It would be a decision he would come to regret bitterly.”
There are are certainly many investors at the time who felt that Link should have given Woodford a chance to turn things round. One such investor, Julian Thornett, is quoted in the book.
“I would much prefer Woodford to sort things out,” Thornett said, “as he has skin in the fund both financially and in terms of saving his reputation.
“In the case of a third-party selling the lot and lining their pockets in the process only their profit motivates them. Crystallising other peoples losses does not hurt.”
One of the interesting aspects of Neil Woodford’s recent interview with the Sunday Telegraph is that he only semi-apologised. Woodford himself clearly believes that Link was largely to blame.
“I can’t be sorry for the things I didn’t do,” he told the newspaper. “I didn’t make the decision to suspend the fund, I didn’t make the decision to liquidate the fund. As history will now show, those decisions were incredibly damaging to investors, and they were not mine. They were Link’s decisions.”
Clearly we will never know what might have happened if Woodford had been granted his wish to soldier on. For what it’s worth, I suspect by then it was far too late and that he would have struggled to repair the damage.
But, in a sense, that’s surely immaterial?
Active fund managers — especially high-conviction managers like Woodford — will inevitably lag their benchmark for long periods. Yes, Woodford’s underperformance was pretty catastrophic. Even still, he was simply doing what he was (very handsomely) paid to do — pick stocks that he thought would eventually deliver market-beating returns.
It was Woodford’s ACD that should have spotted the problems in the fund — and acted on them — far sooner than it did.
Link, alas, has previous form in this regard. Under its old name, Capita Financial Managers, it was fined up £100 million for its roles in the Arch Cru and Connaught fund scandals.
The sums of money involved in those two episodes put together pale into significance compared to the losses that Woodford investors have incurred.
When it’s finally forced to confront the part it played in the biggest UK investment scandal of modern times, Link Fund Solutions will only have itself to blame.