Neil Woodford’s flagship fund has been a staple of the retail platform’s Wealth 50 list of recommended funds, despite persistent underperformance, alongside his most recent launch, the Income Focus. The firm informed its clients on Monday evening that it had dropped both the Woodford Equity Income and Income Focus funds from its Wealth 50 list following the suspension.
Hargreaves clients accounted for 28% or £2.2bn of the Woodford Equity Income fund’s assets in March.
Wealth 50 ‘not a buy list’
Hargreaves has doggedly stood by the equities manager as others have pulled money and dropped fund recommendations.
Quilter recently abandoned Woodford as manager of one of its UK equities segregated mandates, while wealth manager and platform business Charles Stanley, Aviva, Architas and Jupiter Merlin have also dropped him from their buy lists.
In January, speaking at the launch of the streamlined Wealth 50, which replaced the Wealth 150, head of research Mark Dampier (pictured) described the criticism he has received over his backing of the equities manager as a hassle. Dampier continued to defend Woodford a month later when he said the manager would shine again once Brexit had been resolved.
Portfolio Adviser reached out to Dampier and senior analyst Laith Khalaf, who has also towed the company line in relation to Woodford for many years. Instead, Emma Wall, recently appointed head of investment analysis, fronted up.
Wall says the Wealth 50 is a collection of Hargreaves’ ‘favourite funds’ and not a ‘buy-list’.
“Our job is to highlight the funds we think are best in class and then it’s up to the individual investor to decide whether they want exposure to that particular sector,” she says.
Asked why Hargreaves continued to stick by Woodford despite concerns around the illiquid portion of his portfolio creeping up as the fund was hit by redemptions, Wall reiterated the firm is an advocate of longterm active investing and that Woodford’s returns of 120% over 10 years remain “compelling”.
But she says Hargreaves realise the short-term performance coupled with the gating of the fund “has been a pretty bitter pill to swallow”.
“We do not take lightly our responsibility to our clients and our investors are extremely important to us. We want to provide the best possible information for them to get the best possible long-term outcome and we completely understand why people are frustrated and disappointed.”
‘Wholly inadequate response’
Hargreaves’ response to the Woodford controversy has not gone down well in the court of public opinion.
“The responses I have seen from them so far are wholly inadequate,” says Brian Dennehy, managing director at Fundexpert. “The CEO needs to be seen on the bridge.”
“They over-promoted the fund and kept recommending it when there was no objectively good reason to do so,” he continues. “Now the reason it is removed from their Wealth 50 is because ‘the fund can’t be traded’ – is that it?”
Darren Cooke, chartered financial planner at Red Circle Financial Planning, says the fact Woodford’s flagship fund remained on Hargreaves’ Wealth 50 list over managers like Terry Smith, who would not negotiate with the D2C firm on discounted fees, throws its selection process into question.
“HL have huge power in the market to drive fund flow and being on that list can bring large amounts of money to a manager,” says Cooke. “Basing that list not on quality of manager fund but on the deals HL can do is poor practice particularly when that is not explicitly explained to the client.”
HL stock stutters as reputation takes a hit
“If you’re a Hargreaves customer, with all of the brand and all of the marketing and all of the well-deserved, decent reputation that Hargreaves has built up, you probably don’t expect a fund which has been pushed in your face like Woodford’s to have these issues,” says Mike Barrett, consulting director at the Lang Cat.
“That brand relationship and trust which Hargreaves built up with their customers is probably not being felt by a lot of people today.”
On Tuesday, Hargreaves shares slumped 5% to £21.35p, the lowest price they have fetched since mid-April.
Time for FCA to revisit buy-lists
Many commentators said Monday’s blow-up was a wake-up call that the regulator must revisit best buy fund lists.
The regulator addressed this topic in 2017 as part of its Asset Management Market Study. Looking at data from three platform services, including the UK’s largest D2C firm Hargreaves Lansdown, between 2006 and 2015 it found that firms’ best buy lists were significantly more likely to include their own “affiliated funds” or products it has commercial ties to over non-affiliated funds.
“The impact of the trading suspension on Neil Woodford’s Equity Income Fund is much further reaching than just one fund,” Nutmeg CIO Shaun Port said in a statement on Tuesday.
“While investors who bought the Woodford fund based on the recommendations of a best buy list are left wondering when they will be able to redeem their investments, it calls into question the broader appropriateness of best buy fund lists. As the Financial Conduct Authority highlighted in their 2017 study, there are concerns around links between funds on best buy lists and the platform providers as well as their performance over the long-term. It’s time the regulator revisited best buy fund lists and whether they are acting in the best interest of consumers.”
CWC Research managing director Clive Waller agrees the FCA should be putting more scrutiny on platforms groups but says he isn’t holding his breath for the City watchdog to act.
“The regulator has been asleep on platforms from day one. Should they look at buy lists? Of course, to see if their is any relationship between commercial deals and recommendations. Will they? They’ve had enough reviews on platforms and done nothing as yet.”
Portfolio Adviser reached out to the FCA but did not hear back.
HL backs Woodford in multi-manager funds
For customers in Hargreaves multi-manager funds, which have between 3% and 14% in Woodford’s flagship fund, this is going to be “driving performance in the wrong direction,” Barrett says.
Woodford’s flagship fund appears in six out of 10 of Hargreaves Lansdown’s multi-manager portfolios, while his Income Focus fund appears in the HL Multi-Manager High Income fund.
Seven Investment Management senior portfolio manager Peter Sleep says the D2C firm will be the most worried about the £2.9bn Multi-Manager Income & Growth portfolio, which has 13.3% or £377m invested in Woodford’s flagship fund and was one of Hargreaves’ top sellers last month.
|Fund||Size||% in Woodford Equity Income|
|Multi-Manager Equity & Bond||£296.3m||9.56|
|Multi-Manager Income & Growth||£2.9bn||13.29|
|Multi-Manager Special Situations||£1.7bn||5.25|
|Multi-Manager Strategic Assets||£198.4m||3.00|
|Multi-Manager UK Growth||£202.9m||8.59|
Source: FE Analytics
Wall told Portfolio Adviser the multi-manager range is “well-diversified” and “very liquid” and that the D2C business does not expect the suspension of Woodford’s flagship fund to impact investors in a “significant way”.
Woodford funds represent a 7% or £603m slice of the multi-manager range’s total £8.6bn in assets under management, which Wall says is “not a minute holding but [it’s] not a huge exposure either”.