Business

Double edged sword of Woodford criticism

Neil Woodford of Woodford Investment Management
Peter McGahan

WHEN Friar Tuck boasted of hitting a tree with an arrow, Robin Hood asked him which tree he aimed for, as he had fired into a forest. His response? He drew a ring around the arrow. Easy after the event of course.

The same can be said about Neil Woodford, as everyone queues up to get their pound of flesh and fame from his demise. Good managers don’t become bad managers overnight, so the woodworkers pulling him apart now, I’m assuming, have been aware of the issues for some time and remained silent, or didn’t see the issues.

In which case, remain silent, as the issues were obvious.

None more so than St James Place (SJP) who announced it was terminating a £3.5 billion relationship with Mr Woodford. Really? That’s 40 per cent of the money managed by Woodford.

What on earth would you be doing with that level of exposure to one fund group and ‘maverick’ manager. I say maverick in a positive way, as he has clear skills, but why so much in a manager whose clear skills lie in UK undervalued assets, and few, if any managers would be exposed, if over exposed in domestic UK assets of the smaller kind at this time.

Indeed, it appears SJP had Woodford on their scanners simply because customers had been redeeming money to reduce exposure to it and so SJP responded. Was the problem not there before?

If you are in business, you will know that processes are everything. The pilots who fly us all over the world have tried and tested processes which they stick to, reducing risk to a minimum. If there is a 1 per cent break in process there would 100 per cent checking in place.

A pilot who takes out his normal flip board and says: ‘today, let’s just have a go at it blind’ across the intercom is likely to have as many exits as Mr Woodford is experiencing.

Consider in 2014, the FCA slam-dunked Invesco with an £18.6m fine, one of the biggest ever.

This was after the regulator found a host of failures which impacted investors with significant losses.

Digging deeper, the FCA uncovered £1bn worth of leveraged trades involving highly complex derivatives which had not been explained or communicated to investors. That, ladies and gentlemen, is just mental.

Other issues included nearly 10 per cent of trades in their popular bond funds were not recorded on the day they were executed and that raises the risk that the daily valuation of funds would be incorrect.

Moreover, the FCA also found that diversification rules were breached. Investment funds are not allowed to hold more than 5 per cent in a stock, but Invesco perpetual exceeded that, and still continued to buy more.

The significance? Well, at fault were two funds run by Neil Woodford. See point re 100 per cent checking.

Yet, in 2014 in the same month as the fine, St James place switched £3.65bn out of Invesco to Woodford's new funds. (That’s more than they have invested now, some five years later)!

Confused? You should be. Following redemptions by their customers for poor performance and also widespread across the UK, most notably from the multi manager John Chatfield Roberts of Jupiter asset management, SJP still offered support to Woodford.

SJP also confirmed in an FT Column in March this year that its St James place UK high income fund was its best performing fund year to date and that SJP remain confident in Woodford's ability manage customer money, and the companies in his portfolio represent “excellent value”.

Woodford believes the small caps are the best source of value in his portfolio. Trouble is, that’s not really where his skills really lie.

SJP stated that Woodford had outperformed the market on 139 of 171 rolling three-year periods. That’s like measuring how wet a toilet is by shoving a toilet roll down it. Pointless analysis.

Again in May SJP state they have no plans to change his mandate and remain supportive. A week later, they transfer their entire mandate of £3.5bn away from him to another manager.

That must have been some week of meetings and research. Our column last week on balancing out risk applies in its entirety.

:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a question on Neil Woodford's funds, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit on www.wwfp.net.

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