The Rise & Fall Of Neil Woodford

In a seemingly reassuring announcement, the Financial Conduct Authority (FCA) recently unveiled a redress scheme aimed at providing compensation to investors affected by the Neil Woodford Equity Income Fund.

The fund had been gated in 2019 due to a sharp decline in value and a surge of withdrawals.

However, upon closer inspection, the FCA's compensation deal is far from as generous as it appears. Let's delve into the details and uncover the truth behind this purported resolution.

Limited Compensation for Significant Losses

Under the regulator's negotiated redress scheme, investors may receive 77p in the pound for their outstanding losses. However, this seemingly substantial figure amounts to a mere £235 million, representing just over a fifth of the £1.05 billion gap between the fund's value at the time of gating and the subsequent distributions to investors. In essence, this equates to a mere 22.4p for every pound lost. The compensation only addresses the additional losses suffered by gated investors on illiquid investments compared to those who exited before the gating.

Exclusions and Unaddressed Losses

It is important to note that the redress scheme has several limitations. Firstly, it solely applies to the 350,000 investors who were trapped when the fund was suspended, leaving out an undisclosed number of individuals who withdrew their investments prior to the gating. Moreover, the compensation fails to cover the broader remaining £752 million capital loss resulting from the sale of liquid and illiquid assets post-gating. Additionally, investors are not offered any interest or compensation for the lost access to their funds since 2019.

Lack of Accountability and Future Perspectives

The FCA's focus on liquidity breaches related to unlisted investments leaves other aspects of the scandal unaddressed. The investigation into other involved parties remains ongoing, potentially offering the prospect of further redress from those entities. The regulator justifies its approach by distinguishing between losses caused by misconduct and those resulting from market value fluctuations. The full findings, scheduled for release in October, are expected to shed light on these matters. However, it remains unclear whether the FCA's conclusions will sufficiently tackle the criticisms surrounding the inclusion of non-traditional, dividend-paying companies in a large equity income fund.

Compensation Source and Implications

The proposed compensation payment is intended to come from Link Fund Solutions (LFS), the authorized corporate director responsible for safeguarding investors' interests. LFS played a pivotal role in appointing Neil Woodford as the fund manager, ensuring compliance with the investment remit, limits on illiquid holdings, and borrowing restrictions. While the compensation deal is presented as voluntary, it is apparent that it was obtained from LFS under FCA pressure, thereby implying the regulator's endorsement.

For anyone interested in further exploration of the topic, I recommend the book, "Built on a Lie: The Rise and Fall of Neil Woodford and the Fate of Middle England’s Money".

The book is an eye opening exposé that delves into the dramatic story of the man once hailed as Britain's most celebrated fund manager, and the devastating impact his actions had on investors.

The book traces Woodford's meteoric rise to fame, highlighting his uncanny ability to attract investors with promises of impressive returns and a seemingly fool proof investment strategy. It sheds light on his success in building a reputation as a maverick investor, known for his contrarian bets and bold moves in the financial markets.

It unveils the dark truth behind Woodford's empire. It explores the series of misjudgements and questionable decisions that ultimately led to the collapse of his flagship Equity Income Fund.

The author dissects the allegations of mismanagement and excessive risks taken by Woodford, particularly his heavy investments in risky unlisted companies.

The book delves into the chaotic aftermath of the fund's gating, which left hundreds of thousands of trapped investors reeling from substantial losses and a profound sense of betrayal.

It examines the role of regulatory bodies, specifically the Financial Conduct Authority (FCA), in overseeing Woodford's activities. It scrutinises the FCA's response to the unfolding crisis and questions whether it failed to act promptly and effectively in protecting investors' interests. This may be one of the key reasons for the tone of the FCA's recent announcements.

Conclusion

While the FCA's redress scheme for the Neil Woodford Equity Income Fund aims to resolve one of the City's significant retail finance scandals, the compensation offered falls short of expectations.

Investors are left with only a fraction of their losses covered, with many exclusions and unaddressed aspects of the scandal. As the investigation continues and the FCA's findings are awaited, it remains to be seen if further redress will be pursued.

The saga serves as a stark reminder of the complexities and challenges within the investment industry, underscoring the importance of transparency, accountability, and investor protection.

It also serves as yet another powerful reminder of the risks associated with active fund management and provides a compelling argument for the merits of passive funds.

Passive investing, typified by index funds or exchange-traded funds (ETFs), aims to replicate the performance of a specific market index rather than relying on the decisions of an individual fund manager. By avoiding the potential pitfalls of active management, such as misguided bets and mismanagement, passive funds offer investors a more straightforward and cost-effective way to participate in the market's overall performance.

In my opinion, it reinforces the notion that entrusting one's hard-earned money to a passive investment strategy may provide a safer and more reliable path towards long-term financial success.