The closure of Woodford Investment Management is sad for many reasons, not least that around 30 employees are now out of a job. But we can’t argue with the fact that the closure of the Woodford Equity Income fund is in the best interests of the investors, and such decisions have to be made unemotionally and objectively.
All the key facts to make the objective decision to close the fund were known in June but no such action was taken then. We have been asked to reflect on this, including the role of the FCA.
As I said in a press note to journalists back in June:
“There are 3 options for Neil and his team, hopefully guided by the FCA for some objectivity. Closing the fund and returning investor cash might be the only realistic solution, option 3 below.
There appears to be an assumption that all will be fine if the fund raises cash through selling some assets, and meets the known redemptions. This seems over-optimistic – once the fund re-opens it is more likely there will be a drip, drip, drip of investor redemptions and more pressure to sell assets of the fund. This is not a good solution for anyone, including Neil.
The second option is to convert the fund to an investment trust, which would achieve day to day liquidity, though the price falls could be ugly, certainly initially. Presumably, this would require the approval of the unit holders, and Hargreaves Lansdown would have to play a key role as their clients are dominant. It would be good to hear from the FCA on the plausibility of this option.
If the last option is not realistic, the only satisfactory option remaining is to close the fund and return the cash to unit holders. The investor's interests must be paramount, and this would bring this episode to a close as quickly as possible.
Some have said this third option would be very long-winded. I am not sure it would be much longer than option 1. The Woodford team know the potential buyers for each holding, including the unquoted, as they have been working on this liquidity problem since 2017 - this issue has not come out of the blue.
Whether or not I am being over-optimistic on the time this would take, the FCA and Woodford should be talking publicly about these options, and their feasibility.
It might take 2-3 months for any of these three alternatives to be completed. But a clear statement on these alternatives should be perfectly feasible by the end of next week.”
In that June note, I brought up the role that the FCA should be playing in the process. They should have been more publicly in charge of this situation from the beginning. After all, two of their objectives are:
- To secure an appropriate degree of protection for consumers.
- To protect and enhance the integrity of the UK financial system.
Both of these objectives required that the FCA;
- be very visible during this period,
- address the legitimate concerns of investors (consumers),
- make clear they were in charge so there was confidence in the whole process, and to ensure the integrity of the whole fund industry was not damaged.
In this regard, I believe that they failed, but it doesn’t have to be a wholly negative experience for them, on the contrary. I am sure they will now learn from this episode (which was, to be fair, unique) and will have clear procedures in place for how they will respond next time.
Cynics will not be so sure the FCA will learn – perhaps I am too optimistic! In which case my strong recommendation would be that the FCA themselves (if not the Treasury Select Committee) put together a small group of experienced practitioners and interested parties, including journalists with the experience of the likes of Jeff Prestridge and Paul Lewis, to review and report, with a wide range of powers to interview and require files to be made available.
That lessons are learnt is vital. Though this episode is unique to date, it is but the first of this kind and scale.
What lies ahead is The Great Liquidity Crisis. Though it is of unknown date, it will result in a wide variety of types of funds being suspended from dealing. Some might need closing. Others can reasonably expect to open again. The FCA are going to need to understand the difference between the two, and not be trying to figure that out at the time, when under fire – plan now, in relative calm.
The FCA do not need to say precisely what these plans are. But we all need to know that they are building realistic contingency plans, which in turn must be based on them consulting very widely – a matter on which I would expect the Treasury Select Committee to put them to the test.