Woodford has hit back at Hargreaves Lansdown’s suggestions the equities boutique kept it in the dark over breaches of the 10% limit of unquoted companies in Ucits products.
In a letter addressed to Treasury select committee chair Nicky Morgan, published on Wednesday morning, Hargreaves chief executive Chris Hill said the platform had reached an agreement with Woodford Investment Management that it must be informed immediately if the Equity Income fund’s exposure to unquoted companies exceeded 10%.
“We have subsequently, on 18th June 2019 in FCA chair Andrew Bailey’s response to the Treasury select committee, found out that Woodford twice breached this limit in February and March 2018. They did not inform us of this on either occasion,” Hill said.
But Woodford Investment Management has hit back at this suggestion.
A spokesman said: “The agreement with Hargreaves Lansdown was to inform them of any month-end breaches only. Consistent with all clients, Woodford provided month-end data for investors and at no time was there a month-end passive breach.
“The FCA reference to breaches in February and March 2018, relates to two inadvertent intra-month passive breaches, both resolved before month-end.”
Hargreaves also stated that Link has not responded to its requests to discuss the decision to suspend the fund. A Link Fund Solutions spokesperon said in a statement that it has acted in accordance with applicable rules and in the best interests of all investors.
Quarter of HL clients exposed to WEIF
The letter, which MPs had demanded from Hargreaves last week, also detailed exactly how exposed Hargreaves clients are to the suspended Woodford Equity Income fund with 24% invested either directly or indirectly. In total, 133,769 clients are trapped in the suspended fund through direct holdings, but once clients exposed via the multi-manager range are included the number affected rises to 291,520.
The fund has delivered £41.1m of revenue to the D2C platform, the letter revealed. In 2016 and 2017, the fund contributed more than £10m annually to Hargreaves’ coffers.
HL fee revenue generated from Woodford Equity Income
| Calendar year | HL income received in respect of Woodford Equity Income £m | Total group revenue £m | % of group revenue |
| 2014 | 2.4 | 293.7 | 0.8 |
| 2015 | 8.0 | 308.9 | 2.6 |
| 2016 | 10.6 | 352.6 | 3.0 |
| 2017 | 10.8 | 420.2 | 2.6 |
| 2018 | 7.4 | 498.7 | 1.6 |
| 2019 to end of April | 1.9 | 159.5 | 1.2 |
Source: Hargreaves Lansdown
The figures related specifically to Woodford Equity Income fund meaning Hargreaves clients are even more exposed to Woodford Investment Management as a whole, which also offers the Income Focus fund, a constituent of the Wealth 50 until the Equity Income suspension, plus the Woodford Patient Capital Trust, which is automatically precluded from featuring on the buy list because it is an investment trust.
Collectively, Equity Income investors represent £1.1bn of the fund and 1.1% of Hargreaves’ total assets under administration.
Hargreaves met with Woodford more than 30 times
Hill detailed the platform’s selection process for the Wealth 50 and its predecessor Wealth 150 list with specific reference to Woodford Equity Income.
He said: “Our research and investment team met with the fund manager both in Bristol and Oxford. We also met with their head of dealing, head of compliance, chief operating officer, head of legal and CEO.
“Since taking the decision to include the Woodford Equity Income fund on the list in 2014, we have met with, or conducted teleconferences, with Neil Woodford and his team 31 times to discuss the portfolio and his investment process.”
He noted after two and half years of topping the Investment Association UK Equity Income sector, Woodford’s performance dropped towards the end of 2016. However, he pointed to Woodford’s periods of underperformance in 1999 and 2009 as the rationale the platform used to stick by the manager.
“We believed there was a reasonable expectation that he would do the same again.”
Unquoteds cause of concern by November 2017
Hargreaves noted the increasing proportion of small and unquoted companies in the fund in November 2017, Hill said.
It urged Woodford to cease investments into unquoted businesses, reduce warning thresholds for investments in unquoted companies and abide by Ucits guidelines not to breach the 10% limit on these types of holdings. Woodford agreed, according to Hill’s account.
A Woodford spokesperson told Portfolio Adviser the Equity Income fund hasn’t invested in a new unquoted stock since June 2017.
Hargreaves was reassured of steps taken by Woodford in May this year to sell all unquoted holdings from the fund. “On careful analysis of the situation, and taking a balanced view in the interests of clients, our investment team decided to maintain the fund in the Wealth 50,” Hill said.
