Woodford Concerns

Malthusian

Alexland wrote: »

The FCA do have some requirements on the fund manager such as to demonstrate sophistication in their risk management, notify them when there is a significant change to the fund's risk profile, take reasonable care, etc. If the failure of the Woodford funds was caused by inadequate processes to manage risk there may be liability?

A very fair point, and I will row back slightly by saying that I would not be at all surprised if the FCA fined Neil Woodford a few hundred thousand pounds. Which is virtually irrelevant in the grand scheme, both to Woodford (the fees he will have extracted during the suspension will cover the fine many times over) and especially to his investors.

They may also ban or suspend him but that is of course also irrelevant as his career in fund management is over already.

See also Arch Cru. The directors were fined a few hundred thousands of pounds a piece. Capita, who were complicit in the scam, made a token contribution to the compensation fund and escaped a fine. Most of the blame got dumped on the IFA sector and most of the liability was dumped on the FSCS (i.e. everyone) in order not to upset Capita and their friends. And yes, this is the same Capita - now known as Link - who oversees Woodford.

We can't ruin fund managers for being incompetent, old chap, where would it end. The fine Woodford pays to the FCA for bringing the fund down will have been a fraction of the regulatory fees he (and Woodford IM and Invesco) paid to the FCA for running funds competently (before it went pear-shaped).

Jonbvn

Malthusian wrote: »

What action is required by the FCA? Some (few) managers outperform. Some (most) managers underperform. Underperforming is not a crime. It's not even a regulatory breach. Incompetent managers losing people's money is part of an orderly working financial market.

If you don't want to be exposed to the risk of incompetent managers losing your money you invest in predominantly index funds rather than star managers.

If Woodford was doing something dodgy, e.g. getting kickbacks into an offshore account from the scam companies he invests in, that would merit action from the regulators. However there is absolutely no evidence that Woodford is doing anything like that, and more importantly no reason he would want to do that, unless it turns out that he was hundreds of million pounds in gambling debt to the mob.

In the absence of a debt to the mob, Woodford already had enough money to afford his current lifestyle forever when he launched Woodford IM. Which is why he stopped trying to make money for investors and started to indulge in non-existent grandiose concepts like "patient capital".

Woodford being gulled by scam companies because he is halfway to his yacht, lazy, and motivated by a self-righteous desire to "support fledgling British business" rather than make money for his investors, is not dodgy and does not merit action by the FCA. (Other than writing a few "lessons must be learned" reports to occupy some bureaucrats and keep the public happy.) That is just bog-standard, 100% compliant fund manager incompetence.

You can write it off as incompetence. I do not.

The whole Guernsey listing thing stinks to high heaven. I think he saw (sees?) himself as the next Buffet. Once the Invesco shackles were off he was prepared to take any risk to prove it. The obvious total lack of risk management was clearly not acceptable and should be investigated.

Prism

It has been clear for many years exactly what the make up of all his funds were. You could research the entire allocation on his website or look at the fund breakdown on Trustnet and Morningstar. Both of the income funds have been small/mid cap UK funds for quite a while. Anybody who says they didn't realise this shouldn't have been invested in it - the same for any active fund.
I have little sympathy with DIY investors who decided to invest without advice. I have some sympathy with people who invested under advice and those with exposure to this through a multi asset fund of funds, since those routes are supposed to assess the risks for you. For me Woodford has done little wrong and has been very transparent about his crazy nuts investment ideas the whole time.

bowlhead99

poppy10 wrote: »

Sabina is a cash shell. Claims to be a property company but doesn't seem to actually build any properties, or do anything really other than raise millions in capital, and distribute hundreds of thousands in salaries and fees to the directors.

Moe_The_Bartender wrote: »

And what's going on with Sabina Estates whose website is inaccessible except for the home page and whose accounts show next to nothing but the big cheese seems to be a long time buddy of Woodford?

Moe_The_Bartender wrote: »

Sabina has now delisted from the Guernsey stock exchange worsening his breach of fund rules. This is one of his investments that really should be written down to nothing as the company doesn’t seem to do anything but pay its directors.

Well, BDO signed off the group consolidated financial statements for Sabina Estates Limited for 2018 showing in their cashflow statement that they had added over €21m of property inventory (taking the total to €77m) while issuing €40m of new preference share capital during the year. Inventory went up by more than €21m total because in addition to the few million Euros of purchases and the €16m of direct development costs and €1.5m of allocated overheads, there was also capitalised interest cost (standard practice in a property development business).

So the balance sheet at December was basically €77m of inventory plus €27m of cash, supported by the total €93m of preference shares, some creditors and the rest equity.

According to the auditors, the accounts show a true and fair view of the state of affairs of the group and the accounting policy is that inventory is held at the lower of cost and realisable value. To assess realisable value of land held for development plus development costs, there is a financial appraisal of the revenue expected to be generated when the property is completed and sold. Necessarily, this will involve some judgement. Still, the auditors signed it off.

While we all know that auditors are not infallible, and I have no special insight into the Ibizan property market, and have not seen the development(s) for myself, I think it is a bit of a joke that people who want to bash Woodford will - without evidence, or with evidence to the contrary - express outrage that "Sabina doesn't seem to actually build any properties, or do anything really other than raise millions in capital"[poppy10] or the "accounts show next to nothing" [Moe] or "This is one of his investments that really should be written down to nothing as the company doesn’t seem to do anything..." [Moe] or "staggered that a fund manager of his experience would throw money into scams like Industrial Heat, Sabina Estates..." [Moe]

Either, Woodford did buy into a 'scam' and the company doesn't do anything and is worthless and doesn't have land or develop any property, and the accounts have nothing in them so it should be written down to nothing - if we listen to Moe and Poppy ; or, the company had spent over €77m (including €10m of capitalised interest) buying and developing land which is still worth at least that amount of money, and has €27m in the bank, if we listen to the audited accounts.

I have no special insight myself here, and it is clear that Woodford has made some poor investments, and perhaps Sabina will not succeed in its development efforts, run out of money and only get cents in the Euro back to its investors. I don't know that to be on the cards, but investing in European luxury real estate at the top of a debt-fuelled market risky of course. Probably someone in the press has written negative things about it, and I haven't taken much notice. But it is also clear that anonymous posters on the internet may sometimes be outspoken about something without actually doing any research for themselves (or by doing only cursory / low quality research) and mostly just parrotting others opinions.

The portion of the WEIF portfolio that was in the Sabina Guernsey-listed vehicle the last time a full portfolio listing was released was <2%, so there are probably other more important things to get excited about, notwithstanding the fact that the investment concentration will increase as fund size shrinks, due to the illiquid nature of an unlisted property developer whose properties aren't complete.

poppy10 wrote: »

Even worse is Safe Harbour, started up a few years ago with a vague business plan to "buy a B2B platform." Has raised tens of millions in capital, mostly from Woodford and Barnett, but still hasn't purchased anything years later so still isn't actually doing anything. In the interim the directors have withdrawn millions in salaries and "advisory fees". It's a publicly listed company on AIM but there have been virtually no transactions in its shares, other than one curious buy order last year that was just enough to raise the share price by 10% (from 120p to 132p), exactly the amount needed to trigger a performance bonus for the directors.

Anything Woodford touches seems to be dodgy.

Jonbvn wrote: »

The total lack of due diligence is staggering such that it is appears to suggest ulterior motivation

Yes, it's an AIM cash shell. The "curious buy order last year that was just enough to raise the share price by 10% (from 120p to 132p), exactly the amount needed to trigger a performance bonus for the directors." seems to be entirely uninteresting, rather than 'dodgy'. The CEO had a few hundred incentive shares issued to him which he preferred to hold through his personal trust (i.e. of which he is a beneficiary) because it would be more efficient that way. The company agreed to repurchasing, cancelling, and reissuing the shares to his trust instead.

If the incentive share payouts are subject, among other things, to a 10% annually compounded preferred return being achieved for investors on their net invested capital, they may have set the buyback price 10% higher than the original issue price. But this seems a 'red herring' rather than 'dodgy'.

Messing around to tidy up the corporate records for a few hundred pounds of value difference is all pretty irrelevant to whether investors actually achieve their annualised growth targets. The vesting date is not until 3 years post acquisition (an acquisition that hasn't happened yet) or on a sale of the business. One assumes if the owners of the business (Woodford and Invesco having >50% between themselves) are not happy with the management incentive arrangements they would not vote for it; they could easily change the management if they had someone better in mind.

Institutional investors know that money tied up in a cash shell is very illiquid as you can't get it back, because if there is no coherent plan people won't buy it off you for any more than the cash in the bank. At the last financial statements, Safe Harbour had £27m in the bank of £31m raised, only part of which came from Woodford (who own about a quarter of the entity's equity). In the context of £10bn of WEIF AUM (back in the day ), a few million quid is pretty much nothing in the grand scheme of things to get a foot in the door of the actual funding round once the suitable target is identified and the vehicle needs to raise real money.

So, 'total lack of due diligence' and 'ulterior motivation' are perhaps overblown criticism. Nobody here knows what due diligence was done on the initial opportunity identified - just that nothing has proceeded to completion. A few million tied up in a cash shell out of a few billion of AUM is not the end of the world, whether you choose to call it 'incompetence' or make insinuations of unspecified 'ulterior motives'.

All sorts of things may come out of the woodwork when the fund is looking to quickly monetise its investments and some holdings are not marketable, but this one - at this size of investment - is not in itself the reason for WEIF's failure, nor has anyone produced evidence of it being a scam, entirely unresearched, driven by a specific ulterior motive etc etc.

Moe_The_Bartender

Fair enough, bowlhead. I had only seen the previous year’s accounts which supported what I said but can see that things have moved on in the meantime. I don’t understand why they have to be so coy in providing information on their website which requires prior registration. Perhaps they don’t want us plebs seeing how the other half lives.

Nevertheless, it’s a curious investment and it will be interesting to see how it pans out.

Jonbvn

Thank you bowlhead99 for your written submission to the court

This being a discussion forum and given the situation I think I am allowed to make reasonable accusations, without the same level of proof I would require in court.

Sailtheworld

Looking at what a star manager invests in after they lose money rather than before is like locking the stable door after the horse has done one.

If anyone wants to be late for another party there's always Fundsmith.

AnotherJoe

I fundamentally disagree regards Fs. There's a massive difference between the solid companies Fs has invested in (sticking to it's actual aim) vs the calamitous / hapless / expensive or outright fraudulent companies that W bought that either didn't follow the philosophy (start ups / unlisted in an income fund ? ) or were terrible choices if they did fit the aim of the fund.

bowlhead99

AnotherJoe wrote: »

didn't follow the philosophy (start ups / unlisted in an income fund ? ) or were terrible choices if they did fit the aim of the fund.

'follow the philosophy' does not mean that if income is in the name of the fund, everything must produce a high level of income. The fund needs to produce income but it also needs to grow. Some holdings can yield 6%, others 3%, others 0%, in pursuit of the objective.

From the 2016 version of the prospectus,

CF_Woodford_Equity_Income_Investment_Objective_and_Policy wrote:

The aim of this fund is to provide a reasonable level of income together with capital growth. This will be achieved investing primarily in UK listed companies. The fund may also invest in unlisted companies and overseas entities. The fund may also invest in other transferable securities, money market instruments, warrants, collective investment schemes and deposits...

Unfortunately, being a contrarian means doing what other people are not doing, but it does make you look stupid when those other people get it right, and saying that something was in 'pursuit of the objective' will score you 0 out of 10 with the people who need you to definitely achieve the objective.

Moe_The_Bartender

Contrast this with the FS position.

EQUITY FUND AIM

The Company will invest in equities on a global basis. The Company's approach is to be a long-term investor in its chosen stocks. It will not adopt short-term trading strategies.

The Company has stringent investment criteria which the ACD and Fundsmith Investment Services Limited as investment manager adheres to in selecting securities for the Company's investment portfolio. These criteria aim to ensure that the Company invests in:

high quality businesses that can sustain a high return on operating capital employed;
businesses whose advantages are difficult to replicate;
businesses which do not require significant leverage to generate returns;
businesses with a high degree of certainty of growth from reinvestment of their cash flows at high rates of return;
businesses that are resilient to change, particularly technological innovation;
businesses whose valuation is considered by the Company to be attractive.
Investors should be aware that the application of these investment criteria significantly limits the number of potential investments for the Company's portfolio. It is envisaged that the investment portfolio of the Company will be concentrated, generally comprising between 20 and 30 stocks.

The Company will not invest in derivatives and will not hedge any currency exposure arising from within the operations of an investee business nor from the holding of an investment denominated in a currency other than sterling.