Caveat emptor
Oct. 19th, 2021 08:14 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
qatsiBook Review: Built on a Lie: The Rise and Fall of Neil Woodford and the Fate of Middle England's Money, by Owen Walker
The phrase "built on a lie" here is attributed to Mark Carney, in evidence given to a parliamentary committee, and applies across the whole fund industry: the idea that retail investors can expect instant access to their money as if it were a bank savings account, when to realise that money requires someone else to buy the asset at a reasonable market price - an idea that is, generally, the case for shares in public companies, but not for obscure, privately held companies and start-ups. Like many people, I was an investor in the Woodford Equity Income fund from 2014, and although by luck and impatience I disregarded the continuing Hargreaves Lansdown position that it would all come good and withdrew most of my investment over 2018, I still have a small amount locked up awaiting the final sell-off. Many others were not so fortunate.
What emerges from this book is an aggressive character who performed well for many years at Perpetual (later Invesco Perpetual), running steady income-generating funds, but who was dissatisfied with the constraints imposed upon him and dabbled in more risky small and early-stage companies. Despite having avoided the dotcom boom, and navigated the financial crisis - two defining events which made his reputation - Woodford in fact sought out many tech start-ups and ran a portion of the fund more like a VCT. However, that didn't match the risk profile that was sold to investors, and furthermore, he turned out not to be very good at performing due diligence or identifying good investments in this area (surely the cold fusion company Industrial Heat must rank as a risible nadir). Like a problem gambler piling up debts, Woodford remained convinced that his investments would turn around, but the business stretched and bent the rules on how much of the fund was illiquid, and fell into a trap as investors increasingly sought redemptions from the fund.
It's not all about Woodford, though. The redemption that broke the fund was by Kent County Council, which had unconventionally chosen not to ring-fence its holding in the fund (which would have commanded higher fees). This is the same county council, and some of the same officials, who were caught out with investments in Icelandic banks in the financial crisis. One does wonder at the repetition of what seems like carelessness. Link Fund Solutions - previously known as Capita - also comes in for some stick. Ironically, Link wasn't Woodford's choice as the authorised director for the fund; it was imposed on him by the FCA, even though it had only recently been the subject of an investigation over a poor governance record. At first it failed to monitor the fund adequately, then - perhaps - pressed the button to suspend the fund unnecessarily, inherently destroying the value of the remaining holdings in the fund which were then, inevitably, going to become available in a fire-sale. The wider financial services sector, particularly Hargreaves Lansdown, comes in for criticism. Although commentators continued to praise Woodford's funds and express confidence that a period of under-performance would pass, it later emerged that they had expressed reservations and frustrations over the make-up of the fund, and there are pungent sales of Hargreaves Lansdown shares by some of its employees in the run-up to the fund suspension.
Walker's book is a chronicle of Woodford's rise and fall. It has some insights into how the fund management industry is structured, and how things can go wrong. Occasionally it stretches over into more lurid and overwrought writing about the lifestyles of people with more money than sense. But the number of basic story plots is limited, and this one reveals a stereotypical downfall through over-reaching ambition and arrogance.
The phrase "built on a lie" here is attributed to Mark Carney, in evidence given to a parliamentary committee, and applies across the whole fund industry: the idea that retail investors can expect instant access to their money as if it were a bank savings account, when to realise that money requires someone else to buy the asset at a reasonable market price - an idea that is, generally, the case for shares in public companies, but not for obscure, privately held companies and start-ups. Like many people, I was an investor in the Woodford Equity Income fund from 2014, and although by luck and impatience I disregarded the continuing Hargreaves Lansdown position that it would all come good and withdrew most of my investment over 2018, I still have a small amount locked up awaiting the final sell-off. Many others were not so fortunate.
What emerges from this book is an aggressive character who performed well for many years at Perpetual (later Invesco Perpetual), running steady income-generating funds, but who was dissatisfied with the constraints imposed upon him and dabbled in more risky small and early-stage companies. Despite having avoided the dotcom boom, and navigated the financial crisis - two defining events which made his reputation - Woodford in fact sought out many tech start-ups and ran a portion of the fund more like a VCT. However, that didn't match the risk profile that was sold to investors, and furthermore, he turned out not to be very good at performing due diligence or identifying good investments in this area (surely the cold fusion company Industrial Heat must rank as a risible nadir). Like a problem gambler piling up debts, Woodford remained convinced that his investments would turn around, but the business stretched and bent the rules on how much of the fund was illiquid, and fell into a trap as investors increasingly sought redemptions from the fund.
It's not all about Woodford, though. The redemption that broke the fund was by Kent County Council, which had unconventionally chosen not to ring-fence its holding in the fund (which would have commanded higher fees). This is the same county council, and some of the same officials, who were caught out with investments in Icelandic banks in the financial crisis. One does wonder at the repetition of what seems like carelessness. Link Fund Solutions - previously known as Capita - also comes in for some stick. Ironically, Link wasn't Woodford's choice as the authorised director for the fund; it was imposed on him by the FCA, even though it had only recently been the subject of an investigation over a poor governance record. At first it failed to monitor the fund adequately, then - perhaps - pressed the button to suspend the fund unnecessarily, inherently destroying the value of the remaining holdings in the fund which were then, inevitably, going to become available in a fire-sale. The wider financial services sector, particularly Hargreaves Lansdown, comes in for criticism. Although commentators continued to praise Woodford's funds and express confidence that a period of under-performance would pass, it later emerged that they had expressed reservations and frustrations over the make-up of the fund, and there are pungent sales of Hargreaves Lansdown shares by some of its employees in the run-up to the fund suspension.
Walker's book is a chronicle of Woodford's rise and fall. It has some insights into how the fund management industry is structured, and how things can go wrong. Occasionally it stretches over into more lurid and overwrought writing about the lifestyles of people with more money than sense. But the number of basic story plots is limited, and this one reveals a stereotypical downfall through over-reaching ambition and arrogance.