Woodford first published his entire portfolio holdings in July 2014 – topped by Astrazeneca, Glaxosmithkline and British American Tobacco – just under a month after the offer period on Equity Income closed. At the time, Woodford said the asset management industry had been slow and reluctant to be fully transparent with unit holders about where their money is going.
However, on Monday evening, almost five years later, Woodford admitted his transparency was a mistake in a video updating investors trapped in Equity Income, following its suspension 28 days earlier.
‘Damaging in a period of underperformance’
“When we set Woodford up five years ago, we felt our investors would value the information that we were able to provide,” he said.
“I think what we underestimated is how our full portfolio transparency would become more damaging in a period of underperformance. In essence, the transparency became more damaging than the value it created for our investors.”
Woodford Investment Management has withdrawn full portfolio transparency, he said.
Portfolio Adviser has sought clarification from Woodford about whether this is permanent or applies only to the period of the fund’s suspension.
‘A sell list for the rest of the market’
Woodford did not specify how transparency has been “damaging” for investors in the fund.
“We would stress that the problems facing Woodford Equity Income are predominantly structural – but given the high proportion of illiquid stocks currently held in the fund, transparency is likely to be making a bad situation worse,” says Interactive Investor head of investment Rebecca O’Keeffe.
“Full, monthly disclosure can be a double-edged sword for fund managers. For a star fund manager, publishing your holdings can help to boost valuations as other fund managers and individual investors seek to replicate some or all of your holdings. However, when things begin to go wrong and a fund manager faces substantial redemptions, a list of up-to-date holdings can serve as a sell list for the rest of the market
“This is unquestionably true for Woodford Equity Income, and the situation has clearly been exacerbated by the lack of liquidity among many of Neil Woodford’s holdings.”
Short squeezes and overhangs
Merian Global Investors was among the short sellers circling Woodford Equity Income holdings in the aftermath of the fund’s suspension, shorting 1.13% one day after the announcement from outsourced authorised corporate director (ACD) Link Asset Services.
That same day, GLG Partners shorted Newriver Reit and Gladstone Capital Management shorted Burford Capital.
In the case of illiquid stocks, going short would not always be an option, says AJ Bell investment director Russ Mould. “If it was difficult just for Neil to sell them, then it’s not going to be easy for the hedge funds to borrow them short them and then buy them back.”
In several instances stock rallies have coincided with Woodford exiting a stock, which Mould says could be due to a short squeeze in the case of larger stocks or market overhang when it comes to Woodford’s less liquid holdings.
Sensyne Healthcare, e-Therapeutics, Raven, Horizon Discovery and Benchmark Holdings are among the stocks that have rallied in tandem with Woodford slashing or exiting the stock, according to regulatory filings.
Funds industry cautious on transparency
“The industry has always been a bit cautious about being too transparent – probably for these exact reasons,” says Willis Owen head of personal investing Adrian Lowcock.
But Lowcock thinks there is room for more transparency from fund managers about liquidity, plus better communications about positioning, particularly as it relates to the fund objective.
Adviser Centre director Gill Hutchison says the concept of full transparency is “clearly a laudable one” and plays down its role in Woodford’s woes.
“The problem is less about the transparency, more about the composition of this very large fund,” Hutchison says. “For a big fund investing in larger-cap stocks, significant in/out flows should be manageable in most market circumstances. Problems arise when less liquid stocks are introduced to the equation… there is a good reason why small-cap and specialist open-ended funds seek to control their fund sizes.”
FCA requirements for open and closed-ended funds
Woodford is not the only asset manager to disclose portfolio holdings.
Franklin Templeton Investments and Seven Investment Management are among the fund managers who Portfolio Adviser looked at that publish portfolio holdings on their websites.
The FCA handbook requires asset managers to report on full portfolio holdings twice annually according to the reports and accounts section focused on collective investment schemes.
When it comes to investment trusts, FCA listing rules require “comprehensive and meaningful analysis” of the portfolio including a breakdown of the different types of assets. The Association of Investment Companies recommends investment companies disclose all investments above 5% of the value of the portfolio, at least the top 10 largest holdings and further details on any unquoted investments.
Blog versus shareholder meetings
Fundsmith founder Terry Smith fronts up to investors via shareholder meetings, which Woodford ruled out in 2017.
“We prefer to use technology to give investors access to Neil – via the blog, responses to comments and our live Q&A sessions. That way he can maximise his time doing what he does best – managing your money,” Woodford head of investment communications Mitchell Fraser-Jones said at the time, in response to a request made in the comments section of the blog.
Lowcock says he wouldn’t be too worried about Woodford not fronting up to investors in a shareholder meeting noting some fund managers are better public speakers than others.
“Woodford was quite accessible for those who engaged in it,” he says, but adds not all of his hundreds of thousands of investors would have engaged with the Woodford blog, particularly as the rise of platforms exacerbates the disconnect between fund managers and retail investors.
“He was transparent in what he was doing but did investors get access to that properly, were they made fully aware of it by the right groups,” he asks. “I think people just trusted the name and expected him to run money the way he’d always run money. This was Woodford Equity Income, it wasn’t Woodford Small Cap Unlisted Growth. Telling people is one thing but using an equity income for it is not the right vehicle at all.”