Breakingviews - Neil Woodford fine belies ongoing illiquid appeal

Reuters

a day ago

LONDON, Aug 5 (Reuters Breakingviews) - Neil Woodford's penalty looks odd in the current climate. On Tuesday, the UK Financial Conduct Authority (FCA) fined the fund manager 6 million pounds for poorly managing liquidity risks in his 10-billion-pound vehicle. Woodford's fall from grace is specific, but his big idea, including hard-to-trade assets in a fund format for retail investors, is now mainstream.
Woodford, who made his name at Invesco Perpetual for big bets on British stocks like AstraZeneca, was one of the country's most famous stockpickers when he set up his own boutique in 2014. From there, he quickly amassed 10 billion pounds through a mutual fund. An overexposure to unquoted companies like biotechs, however, backfired after his performance lagged, investors yanked their funds, and Woodford was forced to sell his pool of more widely traded assets to honour the requirement to return investors' funds within four days. By the time the Woodford Equity Income Fund was forced to shutter, in June 2019, the fund had just 3.6 billion pounds of assets. And only 8% could be sold in under seven days, the FCA reckons.
The fine was a long time coming, given the fund was suspended over six years ago, and retail investors who suffered 'life-changing, opens new tab' financial losses after it was liquidated have been campaigning for greater disclosure over what went wrong, and for reform of the watchdog since then. The FCA has hit Woodford and his management group with 46 million pounds' worth of fines, and banned him from managing a retail fund. Woodford Investment Management said in a statement that it disagrees strongly with the FCA's decision, and argues that the fund's liquidity rules were set externally by the fund administrator, and that the regulator, then overseen by Bank of England Governor Andrew Bailey, 'was fully-sighted' on the fund's situation. It is challenging the fine at a UK court.
Arguably, Woodford was ahead of his time. Increasingly policymakers are keen for private investors to get a bigger slice of hard-to-trade assets, where returns are higher than public securities. The hottest product in financial markets is the evergreen structure, pioneered by the likes of Blackstone (BX.N), opens new tab, which allows individual investors to own private assets like credit and equity, and withdraw their money.
Those structures are very different from the open-ended vehicle that Woodford ran. They typically seek to limit redemptions to 5% of net assets a quarter, for example. Yet the British stockpicker's fate illustrates that liquidity rules can be hard to adapt to changing situations: his performance suffered after Brexit dented demand for UK stocks. And, whereas Woodford was an outlier, now retail demand for illiquid assets is the mainstream. Oliver Wyman reckons that wealthy individual clients' exposure to private credit could total some $1.5 trillion by 2029 from $300 billion to $400 billion in 2024. If these funds were hit by a Woodford-style run their collapse would have far graver consequences.
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