The Woodford Saga

The below is not meant to be investment advice specific to any individual; it is for informational purposes only. 

What happened?
 
Investors in the main fund of Woodford Investment Management have, since early June, been blocked from withdrawing their money. This news made headlines in the UK because Woodford is a household name in the UK investing industry and many people are invested in his fund. Often, they invested with the help of an investment service like Hargreaves Landsdown – which recommended the fund on its ‘Best Buy’ list. In other cases, people invested in the fund on the advice of their financial adviser

The key problem
 
Previously Woodford had only invested in the biggest companies in the UK – stocks that could be easily sold if investors wanted their money back. But in recent years Woodford began investing in smaller companies whose shares were difficult to sell in any meaningful amount. Imagine if you owned a stake in your local dry cleaners – you can’t decide one morning to sell that stake and expect the proceeds to be in your pocket by the end of the day. It would take weeks, if not months, to sell your stake – at least if you wanted to get a price that reflects the market value.
 
Woodford didn’t own any dry cleaners – but he did own lots of shares in various other small companies. The fund’s performance didn’t match investors’ expectations and as more and more investors began to withdraw their money, the decision was made to stop any further investors from withdrawing their money (for a temporary but indefinite period of time). Woodford is now gradually selling the fund’s ownership of small companies so that when the fund re-opens it will only own shares in some of the UK’s biggest companies. In the future, when investors want to get their money back, Woodford will sell shares in companies that are much more actively traded – and will be able to redeem investors if they want to withdraw their money.
 
The key problem was that Woodford owned shares in small and private companies that could not be quickly sold and then investors bought his fund believing that their holding in his fund could be easily sold. There was a clear mismatch in expectations. Eventually, the decision was made to eliminate this mismatch by halting investors’ ability to withdraw their money.

Some lessons that can be learnt
 

1. Picking funds is a difficult proposition. While it’s certainly true that some fund managers outperform the broad market over a long period of time, even the most successful fund managers need to be closely monitored by their investors. Arguably Woodford’s biggest mistake was moving away from a strategy that had served him and his investors well – buying only big companies – and invested in lots of small companies. An astute investor or adviser should have been aware of this shift in his style and cognisant of the risks it entailed.​
2. Investors’ expectations of liquidity must match the underlying investments within a fund. Unfortunately, just because a fund can be easily bought or sold in normal times doesn’t mean this will always be the case. Whenever withdrawals from a fund are blocked, it is almost always illiquid investments that are the root cause. Illiquid investments are not necessarily a bad thing – your home, for example, has probably been a very good illiquid investment – but investors must know that illiquid investments entail the risk that they might not be able to withdraw their money immediately. The good news is that there are lots of funds that never own illiquid investments, including low-cost funds that simply track the value of the stock market as a whole.

 
It is unfortunate that this episode is hurting people’s trust in financial markets and causing people to refrain from investing. A sound, responsible investment strategy is one of the most dependable ways to protect and grow one’s wealth over the long-term. Creating and managing such a strategy is somewhat challenging but eminently achievable with a robust approach.
 
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Scott Tindle, CFA is the Founder & Director of Wealth Management at Tindle Wealth Management

For the avoidance of doubt, clients of Tindle Wealth Management are not currently invested in any of Woodford Investment Management’s funds nor have they ever been.

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