The Woodford Affair - Poor media coverage

Prism

Deleted_User wrote: »

Firstly, many IFAs recommended Woodford.

Thats something we really can't know. When people post their IFA portfolios here for review you don't tend to see Woodford on the list but that isn't to say some IFAs did use the fund. It looks like HL accounted for almost half of the Woodford Equity income funds size which suggests a very heavy DIY usage as IFAs don't seem to use HL much. I have no stats either but I assume that most people invested in Woodford were doing it off their own back with little basis but the HL 'recommendation' and the star manager name.

Secondly, lots of other active funds still around that recommended by IFAs holding illiquid assets. Always possible for them to underperform leading to large withdrawals and instability

Its interesting to see how some other managers try to deal with liquidity. For example Fundsmith quotes a 7 day liquidity stat. Its 57% today with a fund size of 19bn - it was 92% in Jan 2016 with a fund size of 4.6bn. Or take Stewart Investors who have at various times soft closed their various EM and Asia Pacific funds when they got too large. Some funds like Buffetology seem to hold an allocation of large liquid stock to go along with their mainly small company allocation. I use a microcap fund which has a backup lending facility available if they need to service large redemptions. I never heard Woodford mention liquidity (or lack of) at all.

Really not sure how having an IFA helps. Guess it helps having an IFA who doesn’t recommend such funds but how do you evaluate IFAs if you don’t understand investments?

I am working under that assumption. That when the Woodford funds turned from relatively large cap focused income funds into small and unquoted company growth funds (with a scattering of illiquid REITs added in) then IFAs should adapt. I clearly could be wrong but any IFA's who stayed in will now likely be facing criticism from their clients.

As far as I can tell, four things made Woodford special:

1. More transparent with his holdings than the other funds. When the trouble started it meant an annual downgrade from the Morningstar and eventually short-selling which precipitated and accelerated the end.

2. A lot of large institutional clients who could withdraw huge chunks instantaneously

3. Popularity of a star manager which resulted in size he couldn’t manage. This story keeps repeating again and again and again but people still fall for stardom

4. These funds were genuinely active rather than closet passive. By definition this means long periods of significant underperformance leading to risk of large withdrawals.

Also, he invested in illiquid unquoted stocks which tripped the 10% rule several times. I haven't heard of other funds with this issue although I did notice that some of the Merian UK funds which had holdings in unquoted companies like Hut Group changed their model after the Woodford suspension.

Moe_The_Bartender

Prism wrote: »

I am working under that assumption. That when the Woodford funds turned from relatively large cap focused income funds into small and unquoted company growth funds (with a scattering of illiquid REITs added in) then IFAs should adapt. I clearly could be wrong but any IFA's who stayed in will now likely be facing criticism from their clients.

REITs are not illiquid. That’s the whole point of using them instead of OEICs like the gated M&G Property Fund.

Prism

Moe_The_Bartender wrote: »

REITs are not illiquid. That’s the whole point of using them instead of OEICs like the gated M&G Property Fund.

Yeah good point - for some reason I had it in my head that some of Woodford's REITs were unquoted too but thats wrong

Malthusian

Deleted_User wrote: »

Firstly, many IFAs recommended Woodford.

Citation needed.

Most of the money that went into Woodford was from Hardcheese Pantsdown, St James's Place, DIY investors, and institutional investors like those councils using taxpayers' money to make a risk-free gamble. Some IFAs recommended Woodford but "many" requires numbers.

Secondly, lots of other active funds still around that recommended by IFAs holding illiquid assets. Always possible for them to underperform leading to large withdrawals and instability

There's no other Woodfords holding a significant enough amount of assets to make a Woodford-shaped hole in the ground. If there were the media would have been running "Are they the next Woodford?" articles or they'd have already collapsed after investors fleed for the exits fearing the next Woodford.

The other potentially illiquid funds commonly used by IFAs would be open-ended property funds, where suspensions are normal and expected. IFA clients are more likely to hold on through the dips instead of panicking and crystallising a loss.

1. More transparent with his holdings than the other funds. When the trouble started it meant an annual downgrade from the Morningstar and eventually short-selling which precipitated and accelerated the end.

This didn't actually matter. Very few people who invested in Woodford paid any attention to Morningstar (they held HL Multimanager funds or only looked at the Wealth Shifty) and Woodford can't employ the Enron defence because illiquid shares can't be short-sold.

Moe_The_Bartender wrote: »

REITs are not illiquid. That’s the whole point of using them instead of OEICs like the gated M&G Property Fund.

Depends on your definition of illiquid. The underlying investments are just as illiquid as M&G's. Some would say that if you have to swallow a 30% discount to the NAV to get out of the fund during a panic it's illiquid.

I could sell my house tomorrow if I went to webuyanyhouse.com and if I was really desperate for the money I could take out a bridging loan and have the money in my account the next day. I still define it as illiquid because it takes a long time to get the money if I want something close to full value.

Likewise if you want to sell a REIT during a crisis and not swallow a massive discount, you have to do the same thing that M&G holders are doing, wait.

SonOf

Firstly, many IFAs recommended Woodford.

Depends on your context of many. Yes, there were IFAs that used Woodford. However, as the fund was mostly used by DIY investors, some tied saleforces (SJP for example) and institutional investors, the volume suggests that most IFAs did not use it or if they did, they got out earlier.

The fund due diligence/research company we use is used by thousands of other IFA firms. So, they would have been told in 2017 not to use it. That leaves several thousand other IFA firms using other companies for research/due diligence and I cannot speak for them.

So, yes, some IFAs would have recommended Woodford and some IFAs may not have the best quality tools and research. However, seeing as Woodford was mostly used by non-IFA advised investors, suggests that many of those would have been better seeking independent advice.

Its interesting to see how some other managers try to deal with liquidity.

As with any "hot potato", focus does tend to drift onto other funds. For example, that research/due diligence company last year put Jupiter European on the sell list. They wrote a page of text as to why and it included the following:

Our analysis shows 37.1% of the strategy could be liquidated within one week and 47.8% of the strategy could be liquidated within 10 days. It would take
more than 30 days to liquidate approximately 13.9% of the portfolio which includes twelve positions. Having done some analysis on top 10 holdings,
the fund does not hold more than 5 percent of any stock, even at the overall firm level. Given this we don’t expect a liquidity squeeze on the fund in the
coming weeks and months.

I don't recall liquidity getting quite as much detail in previous removal bulletins.

[Deleted User]

Malthusian wrote: »

Citation needed.

Most of the money that went into Woodford was from Hardcheese Pantsdown, St James's Place, DIY investors, and institutional investors like those councils using taxpayers' money to make a risk-free gamble. Some IFAs recommended Woodford but "many" requires numbers.

There's no other Woodfords holding a significant enough amount of assets to make a Woodford-shaped hole in the ground. If there were the media would have been running "Are they the next Woodford?" articles or they'd have already collapsed after investors fleed for the exits fearing the next Woodford.

The other potentially illiquid funds commonly used by IFAs would be open-ended property funds, where suspensions are normal and expected. IFA clients are more likely to hold on through the dips instead of panicking and crystallising a loss.

This didn't actually matter. Very few people who invested in Woodford paid any attention to Morningstar (they held HL Multimanager funds or only looked at the Wealth Shifty) and Woodford can't employ the Enron defence because illiquid shares can't be short-sold.



Depends on your definition of illiquid. The underlying investments are just as illiquid as M&G's. Some would say that if you have to swallow a 30% discount to the NAV to get out of the fund during a panic it's illiquid.

I could sell my house tomorrow if I went to webuyanyhouse.com and if I was really desperate for the money I could take out a bridging loan and have the money in my account the next day. I still define it as illiquid because it takes a long time to get the money if I want something close to full value.

Likewise if you want to sell a REIT during a crisis and not swallow a massive discount, you have to do the same thing that M&G holders are doing, wait.

Agreed. I just noticed that funds recommended by IFAs, such as Royal London ones, hold a lot of property in various forms. They seem to classify it as a “safe” asset alongside bonds when claiming that the fund is “balanced”.

As for IFAs - I don’t know how many recommended Woodford. Have a look at the last paragraph. Personally I agree with the guy who says none should have rather than with the one saying “we would have been crazy not to because PERFORMANCE”. https://portfolio-adviser.com/advisers-anticipating-woodford-comeback-were-kidding-themselves/ But then I am passive.

SonOf

Agreed. I just noticed that funds recommended by IFAs, such as Royal London ones, hold a lot of property in various forms. They seem to classify it as a “safe” asset alongside bonds when claiming that the fund is “balanced”.

Royal London Governed portfolios are risk weighted and will hold investments above and below the overall risk profile but average out to match. People using RL tend to be long term investors and not traders. RL would not suffer the trading issues that OEIC/UT funds have had as professional investors would not be using RL to dip in and out of as they have been with the UT/OEICs.

[Deleted User]

SonOf wrote: »

Royal London Governed portfolios are risk weighted and will hold investments above and below the overall risk profile but average out to match. People using RL tend to be long term investors and not traders. RL would not suffer the trading issues that OEIC/UT funds have had as professional investors would not be using RL to dip in and out of as they have been with the UT/OEICs.

Yeah, we’ve seen how well “risk waiting” works when a bunch of risky assets get pulled together to suddenly become safe.

”RL would not suffer...” I most admire the absolute confidence of advisors talking about the future.

What precipitated Woodford’s demise wasn’t active investors dipping in and and out. It was long term investors with large holdings making calls on their funds.

SonOf

”RL would not suffer...” I most admire the absolute confidence of advisors talking about the future.

It's a matter of fact. The RL property fund is only available in pension fund or life fund form. It is not available in UT/OEIC form. So, traders cannot use it for dipping in and out of as they have been doing with UT/OEIC funds.

So, unless you hold a Royal London pension or life fund investment, you cannot access the RL property fund. Therefore, it is not able to suffer the short term trading issues that UT/OEIC funds have had to deal with in the last decade.

It can certainly suffer other issues but I didn't mention those.

What precipitated Woodford’s demise wasn’t active investors dipping in and and out. It was long term investors with large holdings making calls on their funds.

Long term?

Woodford Income fund only launched under 5 years ago. That is not long term. The fund was heavily used by investors that are more prone to short term decision making. Indeed, it was the speed that many pulled out that caused the demise.

Investors in life and pension funds tend to be long term holds and far less active. The average value of each customer investment is going to be small overall. Unlike the UT/OEICs which have suffered short term inputs and outputs of investors with hundreds or even millions of pounds at a time.

My opinion is that the modern way investors have been using property funds means it is no longer viable for direct property to be held in open-ended investments. It was viable until they started being used by investors in a way that was never intended.

bowlhead99

Deleted_User wrote: »

Yeah, we’ve seen how well “risk waiting” works when a bunch of risky assets get pulled together to suddenly become safe.

”RL would not suffer...” I most admire the absolute confidence of advisors talking about the future.

What precipitated Woodford’s demise wasn’t active investors dipping in and and out. It was long term investors with large holdings making calls on their funds.

If you are a fund-of-funds manager or a large institutional pension fund, you might have an allocation to a product like Woodford because it ticks a certain box for regional focus and style focus within your portfolio and you think he will deliver the goods. If the style drifts, or you want to lower your allocation to the sector or region, or you don't think he is delivering, you may want to pull your money and give it to someone else.

If you are running RL Governed Portfolio, which is a mixed asset fund holding UK and overseas equities, bonds and real estate, and not available as an OEIC for 'free for all' investment outside a bond or pension, you are not going to have Jupiter Merlin's fund-of-funds sticking a billion in for their UK equity income piece and getting worried when you depart from your strategy; or Kent county council's DB pension fund sticking a third of a billion in for their active UK component and getting nervous when you deliver negative returns against the top performers in the sector; or ABC or XYZ professional investor stick in tens or hundreds of millions here or there to punt that Woodford will outperform the index or his sector for six months.

Never say never, of course, but they are different types of funds in their outlook and investor base. As SonOf says, professional investors don't trade big ticket allocations in or out of a RL mixed-asset packaged product - at least, I don't have the data to say that they do, and will take SonOf's word for it, as the argument isn't unreasonable...