The omission of the Woodford Equity Income holding from the Hargreaves Lansdown value for money assessments has raised questions about how much detail should be required from the documents as Rathbones’ assessment highlights its holding in Patisserie Valerie dented performance.
From the end of January, authorised fund managers (AFMs) have been required to publish the documents, which require fund boards, including two independent non-executive directors, to assess the fund on seven criterion broadly covering costs, performance and quality of service.
Hargreaves Lansdown’s and Rathbones’ AFMs are among the first to report alongside the likes of Vanguard, Aviva Investors and Axa Investment Managers.
But while the annual reports for the Hargreaves multi-manager range mention the Woodford Equity Income fund repeatedly, the value assessment for the same funds makes no mention of the effect the suspended fund has had on performance or liquidity.
In contrast, the Rathbones’ value assessment highlights that the UK Opportunities fund had a 2.3% allocation to Patisserie Valerie, which went into administration during the reporting period.
Woodford holding should have warranted some mention
Nutmeg chief investment officer James McManus describes the Woodford Equity Income holding as being “conveniently ignored” in Hargreaves’ value for money assessment, which is dated to the period ended 30 September 2019.
Pointing to the HL Multi-Manager Income & Growth Trust, which had the largest allocation to the fund, McManus says: “Even before [Woodford Equity Income] was suspended, it had delivered subpar returns for an extended period yet there is no mention of any challenge from the board on this, which given that Woodford was a top-five holding in the fund, is surprising.”
The £2.8bn fund had 11.1% in the Woodford Equity Income fund at 30 September 2019, almost three months after it had suspended, according to its annual report. The fund underperformed its Investment Association UK Equity Income sector by 5.78% over five years, the fund board noted with a 25% return for investors.
Six multi-manager funds held Woodford Equity Income to varying degrees, with the smallest weighting being 2.3% in the HL Multi-Manager Strategic Assets. Last month, those funds would have received over £300m from the first distribution from the Woodford Equity Income fund wind down, which sits outside the reporting period for the Hargreaves value assessment.
Square Mile commercial director Steve Kenny thought the Woodford Equity Income holding “would have at least warranted some mention” given the task of the fund board is to “look at what’s been delivered to the year end as if they were recipient of the investment”.
“They could have put something like ‘we’re endeavouring to work with the managers to ensure that we optimise the value that will be received when it reopens’,” Kenny says, adding the exact wording is less important than the acknowledgement the fund had had a significant weighting in the high-profile fund.
Rathbones fronts up on Patisserie Valerie
The Rathbones assessment makes Hargreaves’ silence on its Woodford holding all the more noticeable, Kenny reckons. “It’s an excellent example of open, honest communication and I think is in keeping with the spirit of the regs,” he says.
Financial fraud revealed in Q4 2018 that resulted in the holding going into administration had made the stock “worthless”, the fund board said. “This will negatively affect the five-year rolling performance of this fund until 2022,” the document said, noting Q4 2018 performance had been a 19.3% fall compared to a 10.3% drop in the FTSE All Share benchmark.
Additionally, the fund’s tilt to small and Aim-listed companies had resulted in underperformance, the assessment said.
“Quite clearly Rathbones felt exposed enough to feel like they needed to mention it and good for them for doing so,” says GBI2 managing director Graham Bentley, noting most investors would have noticed that level of quarterly fall and wanted an explanation.
The Hargreaves Lansdown fund board presumably felt the Woodford Equity Income fund suspension had had a less noticeable effect on fund performance and therefore did not warrant explanation, Bentley adds. In Q3 2019, after the suspension and the final quarter covered by the value assessment, the fund fell 0.14%, slightly behind the 0.03% gain in the IA UK Equity Income sector.
Candid Financial Advice director Justin Modray says the Hargreaves Lansdown fund board “does not appear overly concerned” with performance generally, noting that all but one of the multi-manager funds covered has underperformed its IA sector average over three years, and all with a five-year track record have underperformed over that period.
FCA wants assessments to be at the fund level
But there are reasons for fund boards not to reference specific holdings, says JB Beckett, former fund selector and independent funds board director.
“I’ve nothing against underlying holdings being mentioned but they could be distracting unless contribution to total return is noted,” Beckett says. But even that is outside assessment guidelines that the document should be data driven “at the fund level”, he says.
He points out the holding period and realisable value of underlying holdings cannot be known with certainty and can differ from the fund’s recommended holding period.
Most firms are falling short on the basics of the value for money assessment without complicating the situation by addressing issues that fall outside the value test, he adds.
Fund Boards Council chief executive Shiv Taneja says not all issues tackled by a fund board behind closed doors will necessarily make it into value assessments.
The CIO will usually play an important role communicating what’s going on in the portfolio management team with individual fund managers unlikely to have much interaction with the board, Taneja says. In the case of Hargreaves and Rathbones, their CIOs, Lee Gardhouse and Julian Chillingworth, both sit on the fund board.
Kenny agrees that Hargreaves is within the letter of the FCA regulations when it comes to the lack of reference to the Woodford Equity Income holding but he says the spirit of the regulations “is to re-establish trust with the end investor”.
“On that premise, I would have thought given the publicity surrounding the Woodford equity Income Fund and the proportion that is within their portfolios it would have been appropriate to flag it.”
