Two years ago, 61-year-old Alison Blinston was heading to the airport for a holiday when her husband spotted an online news article that would change the couple’s financial fortunes. “What’s the name of that fund you have your pension in?” he asked.
On June 3 2019, news that Neil Woodford’s flagship investment fund had been frozen was splashed across the British media. Blinston spent an anxious 10 days on holiday in Iceland, unable to assess the impact on her retirement savings as her investment passwords were at home.
Two years later, Blinston and about 300,000 other UK retail investors have yet to find out what their final losses will be.
On the day the Woodford Equity Income Fund (WEIF) collapsed, it was valued at £3.7bn. While the majority of the fund’s assets have now been liquidated and the proceeds returned to investors, they stand to lose almost £1bn by the time its remaining assets are sold, according to lawyers.
The fund has already paid out over £15m in fees to companies appointed to oversee its winding up.
At the origin of the dramatic affair, was Woodford’s strategy of diversifying away from the publicly-listed companies at the core of most funds.
Instead, Britain’s best-known fund manager ploughed into unlisted investments, which are by their nature less liquid than public holdings.
When WEIF’s declining investment performance prompted a flood of investors to cash out, the fund was left with too few assets that it could easily sell to meet customers’ demands for their money back.
The amount estimated to be lost by investors in Woodford Equity Income Fund
In June 2019, the balloon went up. Link Fund Solutions, a regulatory services company for funds which had the WEIF as a client, froze the remaining assets. While it had a legal responsibility to act in the interests of the underlying investors, its intervention was controversial and has since generated legal action.
The affair has also raised concerns about City regulation and revived old questions about the extent of retail investors’ responsibilities to make their own decisions, accept the risks inherent in markets and, where necessary, take losses on the chin.
FT Money readers with money trapped in the fund are furious that two years after its collapse, they are still waiting for regulators to conclude an investigation into what went wrong, and whether they could be entitled to any compensation. With four pending lawsuits seeking to sign up groups of investors, FT Money tackles the unanswered questions.
Where do Woodford investors stand today?
“The galling thing is that I felt like I had planned my retirement,” says Blinston, a teacher turned management consultant, whose losses mean she has had to delay plans to stop working.
Stressing that she understood investment risk, she says ordinary investors could not have predicted the value destruction caused by the fund’s suspension and liquidation. “I thought there were three levels of scrutiny,” she says.
The first layer of oversight came from Link, the fund’s authorised corporate director, whose job was to supervise Woodford’s management of investors’ money, and is now responsible for selling off the fund’s assets to pay back clients.
Second, the Financial Conduct Authority, the UK’s financial regulator, responsible for overseeing the consumer investment market. And third, Hargreaves Lansdown, the FTSE 100 company and the UK’s largest investment platform, which offered WEIF to clients. Blinston and many other retail investors say its promotion of the WEIF fund in its popular “best buy” list gave her the confidence to select it.
FT Money readers who have suffered financial losses from the fund’s failure say there are unanswered questions for all three institutions.
To date, Link says it has returned £2.54bn of cash to investors.
Value of Woodford Equity Income Fund when it collapsed in June 2019
However, many readers believe the decision to liquidate the fund and drip-feed the proceeds back to investors was the wrong approach, and are especially sore about the prices achieved on the fund’s unlisted assets.
“I have lost more money through Link’s appalling mismanagement of WEIF’s closure than through Woodford’s original sin,” is how Ian, one FT Money reader, sums it up.
After the most recent round of payouts, Link put the remaining value of the fund at £125m. If those assets were all sold at that price, it would leave a gap of just under £1bn between the fund’s value when it was suspended two years ago and the amount of cash investors got back.
Some investor readers wish Link had taken more time to get a better price.
“I disagree with an approach that prioritises the speed of returns over the amount returned,” says Iain, another FT Money reader whose current losses stand at £17,500. “I do wonder if I have lost money because the investment industry wants to get it over and done with so they can move on,” he adds.
Ryan Hughes, head of active portfolios at AJ Bell, the investment platform, says: “The big issue you have as you’re trying to wind up a fund like this is that everybody knows you’re a forced seller,”
Hughes says he understands the frustration of investors who had to book an initial loss when the fund closed, and then watch the value of their remaining holdings “being written down before their eyes”.
However, he says Link had to balance the needs of investors who were prepared to wait for better prices on the remaining assets against those who wanted the fund wound up quickly.
Plenty of investors were relying on the fund to generate their retirement income, and in some cases, had placed the bulk of their portfolio with Woodford.
Pauline Snelson from Salcombe, Devon, has been frustrated to watch her nest egg dwindle. She and her husband Fred Hiscock, who together invested £75,000 in Woodford funds, have largely written off the cash they still have locked up, and Snelson has delayed her retirement.
“I’m 67 and I should have retired two years ago. And I couldn’t because of this lot,” she says.
Her 72-year-old husband agrees. “I just feel sick about it to be honest with you. I’m at the stage in my life where you need this additional income coming in.”
The fact that the fund’s underperformance and the losses from the disposal process coincided with a period of market gains compounds the sense of injury.
“I am upset that Woodford has lost over half my original investment when almost everyone else has achieved decent growth [over the same period],” says FT reader Peter.
In response, Link Fund Solutions says it had acted in the best interests of investors and would continue to do so.
“Although we are committed to returning cash to the fund’s investors as soon as possible, we will only accept offers for the remaining assets where they represent a good deal for the fund’s investors,” says Link.
The company adds that it has been assisted on disposals by independent third-party valuation experts. “It follows that the value of the remaining assets and, therefore, the amount investors will receive as their share of future distributions, may increase or decrease as a result of market conditions or underlying performance of the assets.
“We continue to work on ways to realise the value of these remaining assets, which will enable us to return cash at the earliest time while protecting value for investors and not conducting a fire sale of assets.”
What stage have the group legal actions got to?
As the FCA investigation rumbles on, there are currently four separate compensation claims touting for investor support. None are bringing a claim against Neil Woodford himself; instead, most now focus on Link.
Law firm Leigh Day, which says it has signed up more than 10,000 Woodford investors, is building a case against Link for allegedly breaking FCA rules by failing in its duty properly to supervise the running of the fund.
Former Woodford investors who have joined one of four separate compensation claims
According to associate solicitor Meriel Hodgson-Teall, “Link had obligations to make sure the fund was being properly managed” and “had the right spread of risk”. She adds: “They failed to supervise Neil Woodford.”
Harcus Parker, another law firm preparing a case, is also focusing on alleged wrongdoing by Link.
In response, Link says the firm “considers that it has acted at all times in accordance with applicable rules, as well as in the best interests of all investors, and it will continue to do so”.
Two further claims — led by Slater & Gordon and claims management firm RGL Management — are preparing potential cases against both Link and fund platform Hargreaves Lansdown.
Any case against Hargreaves will hinge on proving that the fund supermarket knew the situation with Woodford’s fund had grown dire but still failed to remove it from its “best buy” list of recommended investments. Lawyers will have to prove that Hargreaves knowingly misled investors — a more difficult claim to prove, according to several lawyers.
Hargreaves Lansdown declined to comment.
All four cases are offering clients “no win, no fee” terms. Legal experts predict that eventually the separate claims are likely to join together for efficiency’s sake.
The longer any case takes, the more expensive financing will become, with lawyers estimating that a full trial might take more than three years to conclude. If investors ultimately win compensation, the law firms’ fees would range from around 20 to 30 per cent.
The value of any payout is another contested point, since lawyers will argue that investors also deserve compensation for lost investment performance. However, securing such a payment would likely require a long legal and uncertain battle. A pre-trial settlement, with a compromise on the level of compensation, could also be on the table.
What next for Neil Woodford?
Neil Woodford, who declined requests to comment for this article, has expressed remorse over the fund’s demise, but won’t accept blame for the fallout.
“What I was responsible for was two years of underperformance — I was the fund manager,” he said in a February interview with the Sunday Telegraph. But he argued that Link’s decision to liquidate the fund was the “worst possible thing they could do” and “incredibly damaging to investors”.
Some FT Money readers support this view, although Link maintains it acted in the best interests of investors.
However, many readers are incensed that Woodford went public with a new venture, Woodford Capital Management Partners, and announced it planned to advise investment firm Acacia Research on a portfolio of life science companies formerly held in WEIF, which Acacia bought from Link in 2020.
Woodford initially said he planned to register the new fund management company in Jersey, but the island’s regulator swiftly scotched the plan. “Anyone who gets off the plane thinking that Jersey is a soft touch has wasted the price of the ticket,” Martin Moloney, the regulator’s director-general, told the FT in March.
Since then, WCM Partners — which has said it will only serve institutional investors — has turned up in corporate filings in the Cayman Islands and the US state of Delaware. In late April, the Cayman regulator said it hadn’t received an application for clearance to operate there.
“He shouldn’t be allowed to start any new investment business until all this is settled, no matter where in the world,” said FT Money reader Philip. “What sort of example does this set?”
What about the FCA investigation?
The UK regulator opened an enforcement investigation in June 2019, with both the Woodford empire and Link Fund Solutions in its crosshairs. Two years on, the apparent lack of progress has infuriated MPs on the influential Treasury select committee, who have demanded the FCA set an end-date for the investigation.
Last week, FCA chief executive Nikhil Rathi said the regulator had finished “all key interviews” and was due to finish its investigation “before the end of the year” having analysed 20,000 pieces of evidence.
The regulator has interviewed Woodford as well as his business partner Craig Newman and senior members of Link, but has yet to reveal the direction of its investigation or set an end date. Rathi said: “I appreciate it may be frustrating that I am unable to provide further details” adding that he was bound by confidentiality.
According to two individuals close to the investigation, the regulator is scrutinising to what extent the interests of all investors were adequately considered when the level of liquidity reduced, and the fund was suspended. It has also been looking at whether Woodford or Link broke the “spirit of” FCA rules.
The FCA has the power to fine or ban individuals if it finds wrongdoing.
Any adverse findings in its report could strengthen the legal cases for investor compensation. However, some FT Money readers believe there should be an independent probe into the regulator’s role and its failure to act on previous warnings about the fund.
“Who is reporting on the FCA’s performance?” asks FT Money reader Iain. “Are they marking their own homework?”
As investors wait to learn the report’s conclusions, industry figures await the wider ramifications of the FCA’s probe — in particular, what the regulator says about the role of authorised corporate directors and the potential conflicts of interest that could arise from their supervision of fund managers, and whether it will tighten the rules surrounding “best buy” lists.
Woodford investors are still waiting for a reckoning — although few readers expressed much hope of receiving any compensation.
Blinston said she has signed up to one of the joint legal actions mostly because she doesn’t want attention on the scandal to fade. “I do hope that it will raise the profile of the shortcomings of everyone involved,” she says, adding she will no longer invest in anything but the safest products.
The collapse of a fund that was so popular with retail investors has also shaken her faith in the wider investment industry. “Ordinary people, like my children and grandchildren, are now are saying they won’t save for a pension because they don’t trust it.”