Woodford's Fall from Grace - Partridge Muir & Warren Ltd (PMW)

Woodford’s Fall from Grace

Financial Market Commentary May 2019
24th May 2019

Depressed Businessman Leaning His Head Below a Bad Stock Market Chart

Simon Lewis, CEO of Partridge Muir & Warren, gives his thoughts on the downfall of the LF Woodford Equity Income Fund.

The highly publicised unravelling of Neil Woodford’s reputation as a fund manager has been sad to witness but has not come as a surprise to us. The suspension of his flagship fund, LF Woodford Equity Income, has left tens of thousands of investors with no access to their money and the likelihood that heavy losses will be incurred. As the fund races to liquidate investments, hedge funds circle, short-selling the stocks they know that Woodford will be compelled to dispose of. Financial markets are a brutal place for those that have left themselves exposed.

Fortunately, we spotted the signs of trouble over a year ago and I’m pleased to say that we systematically removed Woodford’s funds from PMW client portfolios throughout the course of 2018.

It is somewhat surprising that other supposedly reputable money managers either failed to spot such signs or simply failed to act in the best interests of their clients. Staggeringly, Hargreaves Lansdown continued to push the fund to its investors almost to the very end; perhaps this betrays an unhealthily cosy relationship between the two. It is certainly a salutary reminder of the dangers of DIY investment; a recommendation has no currency if the firm making it does not bear any responsibility in making it.

We identified that Woodford’s funds were following an increasingly risky investment approach by allocating an escalating proportion of their funds to shares in companies that were not listed on the stock market. Although the objective was to enhance returns, there was a corresponding acceptance that risk for the investors would be increased.

Whilst there is nothing wrong with making long term investments, they have no place in an open-ended investment fund. This is because such funds must be able to meet redemption requests and therefore need to be able to easily dispose of the investments that have been made. Investments in companies that are not stock market listed are not liquid. They are also more difficult to value.

We took this change in approach as a sign of overconfidence because the manager assumed that new money from investors would keep flowing in and did not legislate for a reversal of this trend. Overconfidence is not something that we tolerate when allocating our clients’ money to investments. Sadly, when investment stories end sourly it is usually because those managing the money have lost sight of whose money it really is.

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