I am angry.
I am angry with Neil Woodford as an investor, as an industry peer and as someone active in corporate governance. On all three counts, Woodford has angered me in his decision to transfer £73 million of unquoted stocks from his Woodford Equity Income fund to his Woodford Patient Capital investment trust.
There are a number of questions about the asset swap on many levels and the issues of corporate governance and control are the ones that concern me the most.
Woodford Investment Management houses a fund manager with a larger-than-life reputation who has built his own company. Arguably in such companies, checks and balances should be even tighter, and standards of conduct higher, than normal in order to avoid conflicts of interest and excessive influence from the figurehead.
The unquoted assets transaction raises a number of questions over the role of the fund’s own governance body and the oversight functions within the investment group.
Specifically, what role, if any, did either of these oversight bodies have in the fund building up such a large weight, estimated at nearly 18%, in unquoted stocks in an open-ended vehicle?
While this is not in breach of the 10% limit the FCA places on funds, given unquoted stocks which have committed to float imminently do not count towards it, it is a huge amount for a mainstream equity income fund to hold.
And what role did they play in the decision to transfer £73 million of these, plus £6 million in cash, into Woodford’s investment trust, paying net asset value despite the shares trading at a double-digit discount?
What makes this case even more worrying from a corporate governance perspective is that all three agents – the trust, the fund and the manager - are within the same Woodford ‘family’.
Would, for example, the fund have bought shares in the trust at a substantial premium over the market price if the fund was run by a third party? If so, why?
How does the board of the trust demonstrate that the decision to support this transaction is not related to its manager’s difficulties in managing another separate product within his stable?
And how do all parties demonstrate that this transaction would have been appropriate and in all shareholders’ interests if the three parties in question were independent entities trading at arm’s length?
Fundamentally, this raises worrying questions over exactly who is providing the appropriate oversight of the manager, both within his company and by the governance of the fund and trust.
Personally, if I was facing serious investment performance challenges I would have veered miles away from any action that could damage my reputation further and undermine trust.
It’s proved the final straw for me and my investment in his income fund. While his performance difficulties had persisted, I had been prepared to give the legendary manager more time. But my concerns over who is overseeing and challenging Woodford within his fund group are such that I have now sold the holding.
I’ve now joined the many who have lost patience with the manager, judging by fund flows. In contrast, Woodford’s highest profile backer, Hargreaves Lansdown, has maintained its strong support, the scale of which was revealed by Citywire’s Funds Insider last week.
One of the big risks to Hargreaves Lansdown is the reputational damage of getting such a big call wrong. Knowing when to take a loss is one of the key drivers of good investment performance.
Given any redemptions from Woodford’s funds would probably stay under Hargreaves Lansdown administration, and the damage sticking by the manager is doing to the performance of Hargreaves Lansdown’s multi-manager funds, it seems even more curious.