Industry questions why Hargreaves assets in Woodford got so high

Rival platform drops funds from buy list once clients represent more than 10%

Hargreaves Lansdown has remained mum on its policies around client concentration in Wealth 50 constituents as it faces criticism for letting its clients account for such a large proportion of assets in the Woodford Equity Income fund.

In a letter to MPs published on Wednesday morning, Hargreaves chief executive Chris Hill admitted clients collectively represented £1.1bn worth of assets in the fund at the end of April. That represented 25.6% of the then £4.3bn fund, based on Morningstar data, and the proportion has reportedly been even higher in the past.

“Whether you are a wealth manager, an IFA network, or a fund platform, it is a very normal risk management tool to put a cap on how much assets you control, or have substantial influence over, to limit ‘fund concentration’,” says Nutmeg chief investment officer Shaun Port.

“Hargreaves Lansdown should have had this internal control.”

When questioned about policies around client concentration in Wealth 50 funds, Hargreaves Lansdown pointed Portfolio Adviser to its letter to the Treasury select committee. However, Hill makes no reference in the letter to concerns the platform has about the high level of client assets in Woodford Equity Income.

Interactive Investor imposes hard and fast cap

Interactive Investor, one of Hargreaves main D2C rivals, introduced a cap in April that would automatically drop funds from its buy list where customers held more than 10%. Hargreaves assets in Woodford Equity Income were more than double that threshold at the end of April.

“This is a fairly standard limit used by many institutional investors for the same reason as we are doing here,” says Interactive Investor head of personal finance Moira O’Neill.

“Also, many funds state in their prospectuses that they have the right to freeze trading if net redemption orders exceed 10% of AUM.”

The fixed-fee platform currently has £21bn AUA ahead of its deal with Alliance Trust Savings.

Other D2C platform policies

Interactive Investor was the only major D2C platform contacted by Portfolio Adviser offering a hard and fast rule on thresholds for client assets within a fund, but others say the concentration of their own clients or a large major shareholder is an important risk consideration.

AJ Bell, which has £47.7bn AUA, says it monitors liquidity as part of its review process for its favourite funds list, including how much any single shareholder, including its nominee account, has in a fund.

“Whether funds are removed from the list is assessed on a case by case basis and this would just be one of a number of factors that we take into consideration,” a spokesperson said. No funds have been flagged as problematic in the two years the buy list has been running.

Nutmeg’s investment team reports monthly to its risk committee on fund concentration.

HL needs to ensure liquidity risk is properly assessed

Hargreaves’ distribution power makes capacity and liquidity “doubly important”, says Platforum head Jeremy Fawcett.

“It will need to review its selection criteria and may want to impose caps and quotas but more importantly review selection methodology to ensure that liquidity risk is properly assessed across all fund holders,” Fawcett says.

He notes liquidity was placed front and centre when Hargreaves was questioned over why it doesn’t include investment trusts in its Wealth 50.

“One of the reasons Mark Dampier has given for not including investment trusts on the select list was that they wouldn’t want to be on the list because of the damage that could be caused by large redemptions and the pressure that would impose on illiquid assets,” he says. “Hindsight shows that exactly the same applied to Woodford Equity Income Fund and the concentration of Hargreaves Lansdown clients invested in it has meant that the fallout has been very damaging to the platform’s reputation in front of those clients and more widely. ”

10% limit may not have been enough

But even a 10% cap may not have been enough to shield Hargreaves clients from liquidity issues, says Gbi2 managing director Graham Bentley. He points out that still would still have allowed over £1bn in assets at one point, given Woodford Equity Income peaked in size at £10.7bn in May 2017.

Willis Owen head of personal investing Adrian Lowcock says even the Kent County Council holding may not have raised alarm bells with professional investors at £250m. It was the council’s redemption request that ultimately triggered the Woodford Equity Income fund suspension.

Hargreaves confirmed in its letter to MPs that it is reviewing its actions in relation to Woodford Equity Income.

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