The financial regulator wants to force the firm involved in the Woodford debacle to pay millions back to investors.
Picking where to invest your money can be an incredibly difficult process.
Identifying individual stocks to back is not easy unless you have the time ‒ and frankly the expertise ‒ to do sufficient research into the various firms on the stock market, which is why many of us choose to invest in funds.
Funds invest in a range of different stocks, allowing you to diversify and spread the risk. Some investors go for the low-stress option of tracker funds, meaning that you essentially track the performance of a particular index, like the FTSE 100.
The downside is that you will never beat the market ‒ at best, you will match the performance of that particular index.
Alternatively, you can go with a managed fund, where an investment manager picks out specific stocks and shares to invest in on behalf of their customers.
When it pays off, this can deliver some serious returns. Unfortunately, however, the majority of investment managers don’t actually manage to beat the market, meaning you pay more for substandard returns.
That’s why managers can build up a reputation as ‘superstars’ if they consistently manage to beat the market.
And nobody was a bigger superstar investment manager than Neil Woodford.
The Woodford affair
Neil Woodford broke out on his own back in 2015, launching the Woodford Equity Income Fund (WEIF).
His reputation was such that thousands of investors, large and small, immediately threw their money at his fund, meaning that Woodford was in charge of billions of cash ‒ more than £10 billion at its peak.
Sadly, things went terribly wrong. The fund performed poorly, to the point that a host of investors wanted to withdraw their money and invest it elsewhere. However, the fund struggled to meet those demands, since so much money was tied up in illiquid assets.
As a result, the fund collapsed in 2019, leaving around 300,000 investors unable to access the £3.7 billion of cash tied up in it.
Since then, the assets have slowly been sold off, with around £2.5 billion returned so far.
Now however there is some hope that investors who have lost out due to the episode may be in line for a slice of significant compensation.
Time to pay up
This week the Financial Conduct Authority (FCA), the main financial regulator, announced that it had issued a draft warning notice to Link Fund Solutions.
Link was the authorised corporate director of the Woodford fund, which essentially meant it was in charge of overseeing the fund, and responsible for ensuring that it was being managed properly.
That warning notice includes a proposed penalty of £50 million, but also a whopping £306 million in redress payments for investors.
In a statement, the regulator said: “This potential redress figure reflects the FCA's current view of LFS's failings in managing the liquidity of the WEIF.
It does not reflect any amount which may be owed to anyone else, including members of the fund, as a result of potential wrongdoing by other parties.
FCA-determined redress is based on misconduct rather than losses caused by fluctuations in the market value or price of investments.”
Just to add some complication to matters, Link is currently the subject of a proposed takeover by Dye and Durham.
The FCA ‒ which will need to give its go-ahead for the deal to take place ‒ has stipulated that the takeover can only go ahead if Dye and Durham makes funds available to cover that redress.
Taking action
The regulator noted that it is also investigating other parties as it digs into exactly what happened with the Woodford affair.
It has previously said that it has collected all of the information it needs, it’s simply a matter of determining exactly what action should be taken.
The FCA isn’t the only one calling for compensation for investors who were caught out by the Woodford funds, though.
There are also class action lawsuits being prepared by law firms representing ordinary investors, who have suggested that the proposed £306 million compensation is not enough.
Learning lessons
There are plenty of lessons to take from this sorry affair.
As something of a cautious investor, Woodford’s fund was the first time I bought into the hype of an active manager, putting a chunk of my pension savings into the fund each month.
As a result, I have had a front-row seat for the car crash that has followed, and the staggered payments from Link as assets held within the fund have slowly been sold off.
It’s been an eye-opening experience ‒ it’s not a coincidence that I have gone back to solely tracker funds.
The risks involved in trying to beat the market aren’t for me, and I hope I will be able to resist the hype of the next investment ‘superstar’ that comes along.
It’s also been an important education for the regulator, which clearly was not paying close enough attention to what was going on.
It’s notable that the man who was in charge of the FCA at the time, Andrew Bailey, is now the governor of the Bank of England.
Let’s hope that both he and the FCA are now better placed to spot when issues like this emerge again in future.