Inside the collapse of star manager Neil Woodford’s fund
The Financial Conduct Authority’s decision today to take action against stock picker Neil Woodford for the collapse of his star fund also came with a final notice against the fund’s administrator, Link Fund Solutions.
The notice slammed Link’s part in the £3.7bn fund’s collapse in June 2019, laying much of the blame at the company’s feet.
Woodford’s fund ultimately collapsed due to holding a large amount of less liquid assets, namely tiny companies that barely anybody was trading.
From July 2018, the FCA found that the proportion of assets in Woodford’s fund that could be liquidated within a week fell from 18 per cent to just eight per cent.
When this was revealed, investors rushed to take their money out, but most failed due to the fund being unable to sell its illiquid stocks.
In fact, the regulator said today that most investors would have been unable to redeem their money from as early as September 2018, as it was the least liquid of any other comparable fund on the market.
New evidence has revealed the extent of the problem, showing how much Woodford tried to skirt the rules around how much he could invest in illiquid assets, and how Link seemingly turned a blind eye.
“We need to now acknowledge that Woodford is in need of better management of its liquidity”
Link Fund Solutions two years before Woodford’s collapse
As early as 20 November 2017, Link had internally said that “we need to now acknowledge that Woodford is in need of better management of its liquidity”.
It then began telling Woodford from September 2018 “repeatedly” that it needed to improve the liquidity of its fund, but did not take any serious action to change things.
In the risk models it did have, Link’s metrics and methodologies used to measure liquidity “were unreasonable and inappropriate,” said the FCA.
In its models, the company assumed that all of the fund’s assets could be sold in a single day without affecting the price of those assets, while the firm’s liquidity thresholds “were set in such a way that action would only be required when it was already too late”.
“Had Link adopted reasonable and appropriate monitoring metrics (which it failed to do), some of its own triggers would have been breached in April and May 2018, and continuously from July 2018 at the very latest,” the FCA said.
However, the FCA does not think that Link was not fully to blame for the collapse.
The FCA pointed to one example in particular, where Woodford had notified four companies that he was about to breach the legal maximum of investing 10 per cent of the fund in unlisted securities.
Each of the companies he notified subsequently listed their shares on the tiny stock exchange, TISE, where they all saw essentially zero trades over a period of two years, making them effectively illiquid, but able to skirt the legal requirements for funds.
Meanwhile, in the warning notice statement sent to Woodford today, the FCA described the “unreasonable and inappropriate investment decisions” he made, especially as investors began demanding their money back.
His company ignored the concerns raised by Link, and applied “unreasonable and inappropriate metrics and methodologies to measure liquidity”.
The FCA’s Regulatory Decisions Committee will now consider whether to go after Woodford with legal action.