Woodford Investment Management has said it is exploring options that would prevent “double charging” for Equity Income investors following negative feedback from investors in the open-ended fund.
Hargreaves Lansdown, a long-time champion of Neil Woodford, has also stated it does not approve of the potential layering of fees after the Equity Income fund took a 9% stake in the Woodford Patient Capital Trust in exchange for £73m worth of unquoted stocks previously held in the open-ended fund.
Woodford originally stated Equity Income fund investors would have to pay for performance fees, but has now said they are assessing alternative options. The Equity Income fund has already taken an immediate £9.5m paper loss from its acquisition of Patient Capital Trust fees at net asset value rather than the share price discount of 13%.
Responding to concerned investors in the comments section of a blog post published last Friday, immediately after the announcement, head of communications Mitchell Fraser-Jones said the Equity Income fund, like other Patient Capital Trust shareholders, would pay performance fees via the adjustment of the net asset value. They would also have to pay a 0.75% management fee on the open-ended fund.
However, in a website update posted on Wednesday, Fraser-Jones said the boutique fund house was reviewing its initial stance. “We are conscious of feedback from some investors, who would like to see us take steps to ensure any future performance fee from the trust does not result in double-charging. We are therefore exploring our options here, but no decision has yet been taken.”
Extra fee revenue could slip from Woodford’s grasp
With the Equity Income transaction increasing the size of the trust, Woodford had the potential to earn extra fee revenue from his existing investors in the open-ended fund if the performance fee kicked in.
Currently, the ongoing charges figure (OCF) on the Patient Capital Trust is just 0.19% due to the fact the fund has no management fee, but if it started to deliver cumulative annual NAV returns in excess of 10% with a high water mark a 15% performance fee would kick in.
If disgruntled investors get their way, a sizeable chunk of the closed-ended fund would be exempt from paying Woodford’s fee. The Equity Income fund now holds 8.98% of share capital, or 908,639,238 shares, according to a regulatory filing published on Thursday morning.
The Association of Investment Companies said there is no limit on majority shareholdings in investment trusts. Woodford has signalled its intention to carry out further transfers of unquoted stocks from the Equity Income fund in exchange for Patient Capital Trust shares.
Ucits rules restrict the Equity Income fund from holding an allocation greater than 20% to one vehicle, but the Patient Capital Trust currently only accounts for 1.45% of the fund.
Hargreaves criticises double charging
Rejection of double charging was not limited to the comments section of Woodford’s website.
Hargreaves Lansdown, a long-time champion of Woodford, called on the fund manager to ensure Equity Income investors didn’t face a charge from the trust also. However, it noted this was not an immediate issue because “Woodford Patient Capital is some way off charging a performance fee”.
Last year was the closest the trust has come to achieving 10% returns, when it delivered 6.41%. It lost investors money in 2016 and 2017 falling 3.7% and 2.2% respectively, according to FE data on Woodford’s website.
Hargreaves senior analyst Laith Khalaf told Portfolio Adviser he was pleased Woodford was looking at the charging structure.
Multi-manager funds set the standard
Willis Owen head of personal investing Adrian Lowcock said double charging was a “genuine concern”. “If investors do end up paying both the performance fee and the fund fee they are accessing the investment trust at a much higher cost.”
“I wouldn’t say it is currently irrelevant as it sets out the terms and Woodford’s intentions at the offset,” Lowcock said.
The BMO Managed Portfolio Growth, an investment trust of investment trusts vehicle, does not currently hold any BMO Gam funds but its investment policy states its management fee is dropped from 0.65% to 0.325% on any assets invested in in-house investment vehicles.
JP Morgan Elect Managed Growth, a closed-ended multi-manager fund, likewise charges 0.3% on assets invested in JP Morgan managed funds and 0.6% on assets invested in non-JP Morgan managed funds and direct investments.
While the policies are not directly comparable with the Equity Income situation, due to the Patient Capital Trust not charging a management fee, the closed-ended fund’s performance fee still leaves room for double charging.
