In a letter to chief executive Chris Hill, Treasury select committee chair Nicky Morgan questioned how many Hargreaves’ clients are exposed to the suspended fund either directly or indirectly, the average size of direct investments, plus how much the platform has received in fees from customers invested in the Woodford fund.
Morgan said: “Lee Gardhouse, your chief investment officer, noted in a recent statement that “We’ve been speaking to Woodford for some time about the number of unquoted and hard-to-trade companies in his portfolio.” Can you provide the Committee with a timeline as to your engagement with Woodford, including when you raised your concerns, both before and after the suspension?”
Other questions examined Hargreaves’ decision to include the fund in its Wealth 50 and asked how long it has appeared on the list and how frequently the continued inclusion is considered.
Hargreaves is not alone in championing Woodford
However, the investment industry has argued Hargreaves is not the only platform who should be under scrutiny.
Martin Bamford, managing director at Informed Choice, said: “HL should not be singled out for this treatment; other distributors, including St James’s Place, should also be involved in the investigation.”
Fundscape editorial director Gavin Fielding said Morningstar, RSMR, Square Mile, BestInvest, AJ Bell among others “lauded the fund” even as its performance faltered.
In a post published on Wednesday morning, Fielding said: “In the previous 12 months the fund had seen a major shift in focus.
“Unquoted holdings had risen and exposure to bombed-out stocks rose — this was a clear shift in the risk profile of the fund, where, it could be argued, Woodford’s valuation of unquoted stocks was ‘marking his own homework’.”
The post said during this time at least one researcher noticed requests to meet Woodford were being stalled or referred to others in his team.
“And yet the fund remained in favour; despite the focus on Hargreaves Lansdown, it has to be said that independent researchers like Morningstar and Square Mile didn’t drop the fund until Q1 2019, while at the time of writing RSMR bizarrely has the fund listed but ‘under review’, despite the gating,” he said.
Mike Barrett, consulting director at the Langcat, commented: “Hargreaves merit attention by virtue of being the market leader, but they were not the only provider distributing the Woodford fund and ultimately it’s a caveat emptor service.”
Fund selectors are responsible
Fielding said whether the fund has fallen through “bad luck, serial hubris and mismanagement or otherwise”, fund selectors bear a “huge” responsibility.
“Were investment-naive customers ‘sold’ the fund without appropriate due diligence, ie simply buying a name or following the herd? At what point does the manager, or the advisers and researchers who recommended, promoted and validated the funds bear any responsibility?”
Meanwhile, Bamford added: “There’s an opportunity in all of this mess to challenge important issues around the distinction between guidance and advice, with many followers of the Wealth 50 list appearing to have treated it as advice to invest in this and other funds.”
Platforms and ratings agencies respond
Portfolio Adviser reached out to all of the platforms and fund research agencies mentioned in the Fundscape blog post.
Peter Brunt, associate director at Morningstar, said: “The silver rating was in place when the fund had a different portfolio profile with a greater exposure to larger companies. The sea change in the portfolio started in the second quarter of 2017, when Woodford decided to act on his bullish view on the UK economy and began to move away from large-cap multinationals to smaller domestic names (housebuilders, retail, leisure) in addition to the early-stage stocks.
“While we thought the research team was sufficiently resourced, the change in emphasis in the portfolio did not play entirely to Woodford’s strengths. Aside from security selection problems, his shift into smaller, less liquid, names also left the fund less able to cope with redemptions.”
A spokesperson for AJ Bell said: “When we initially launched our favourite funds list we outsourced much of the research behind it to Square Mile. We brought that in house last year and in the first review conducted by our in-house research team in September 2018 the Woodford Equity Income fund was removed from the list and customers were informed.”
Meanwhile, Tilney’s managing director Jason Hollands, said: “We removed this fund from the Bestinvest Premier Selection fund list on 14 December 2017 and put it under review. On 28 March 2018 we downgraded it to “one star” rating which under our system was a “sell”. This followed meetings with the company.
“Furthermore, in January this year we called this fund as a “Dog”. As you can see, Bestinvest was very clear in raising its concerns about the changing characteristics of this fund and consequently had little client exposure by the time the fund gated, unlike some others.”