Woodford Concerns

Alistair31

dividendhero wrote: »

I wonder if his "research" involved a dart board, some darts and a blindfold?

And copious amounts of alcohol.

Jonbvn

poppy10 wrote: »

Anything Woodford touches seems to be dodgy.

The total lack of due diligence is staggering such that it is appears to suggest ulterior motivation. What is also staggering is the inaction by the FCA as further questionable deals are revealed on a daily basis.

Malthusian

Jonbvn wrote: »

The total lack of due diligence is staggering such that it is appears to suggest ulterior motivation. What is also staggering is the inaction by the FCA as further questionable deals are revealed on a daily basis.

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.

Alexland

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.

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?

https://www.handbook.fca.org.uk/handbook/COLL/6/12.pdf

Alex

Moe_The_Bartender

I'm absolutely staggered that a fund manager of his experience would throw money into scams like Industrial Heat, Sabina Estates and Safe Harbour. If it were his own money, I wouldn’t care one way or the other but he’s a custodian of other peoples' hard earned brass, many of them unsophisticated investors caught up in the hype surrounding him.

It's all very well him hiding behind his factsheets and caveat emptors but it’s a simple fact that an income fund should not be investing in illiquid stocks of companies that instead of producing any income at all are burning cash and returning time and again to call upon further money promised to them.

His actions go beyond negligence and border on recklessness.

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.