The pressure is growing on under-fire fund manager Neil Woodford to waive the fee on the Woodford Equity Income fund after he suspended trading last week.
Andrew Bailey, head of the Financial Conduct Authority, has called on Woodford to “seriously consider” waiving his fees for investors locked into the fund. His comments followed hot on the heels of Nicky Morgan, the chair of the Treasury Select Committee, who said that waiving the fees would be an appropriate “gesture” for the embattled manager to make.
Andrew Bailey agreed that suspending the fund was a “sensible safety valve”, but that Woodford should consider not charging fees to investors, who are currently locked in the funds. However, he acknowledged the role that fees play in bringing the fund back from the brink. “We need him to manage these assets more than ever,” the FCA chief executive added.
Morgan said that Woodford’s daily fees, which are estimated to rake in as much as £100,000 a day for the firm, are a “huge amount of money”. According to Morningstar data, the £3.5 billion fund's "Z" class charges are an ongoing 0.65%.
Woodford Investment Management reiterated that the fees will remain in place because the fund portfolio is still actively managed.
Candid Finance’s Justin Modray believes a fee waiver would have been “morally right thing to do” but that it should have happened last week to retain the goodwill of investors, which he fears has now been lost. He argues that on launch Woodford’s fees were competitive because they wrapped in many of the additional costs, such as registrar fees, that more mainstream companies would charge extra for.
Modray doesn’t believe the drama surrounding Woodford’s fund suspension will lead to a decisive victory for low-cost passive funds over active management, however. He argues that most investors still “chase performance” from star managers and that undermines the drive towards low-cost investing.
Among the brokers, Hargreaves Lansdown is cutting its annual fee of 0.45% a year for those invested in the fund, but many other platforms are not yet following suit. Hargreaves has been criticised for continuing to promote the fund within its Wealth 50 range of selected investments even while performance was lagging. Britain’s largest broker removed the fund from the list last week after trading had been suspended.
Peter Brunt, associate director of fund research at Morningstar, said that a waiver of management fees by Woodford would be “an appropriate course of action”, provided it doesn’t “hinder the efficient management of the portfolio”.
Morningstar last week downgraded Woodford Equity Income to Negative, following a downgrade of the fund in late May to Neutral. After the latest downgrade, analysts said that they consider the fund’s investment strategy as “structurally impaired” because the manager’s priority is now maintaining liquidity rather than exercising “investment conviction”.
However, other commentators have argued that Woodford should not be obliged to waive his fee because he is still actively managing the fund.
Ben Yearsley, director at Shore Financial Planning, says: “I don’t see why the fee should be waived. Property funds all kept charging fees when they gated after the EU referendum in 2016 and no one complained then. There are 40-odd people working at the firm, they shouldn’t be punished because of the situation.”
The last occasion when UK open-ended funds gated their investments was in the aftermath of the Brexit vote in 2016, when asset managers did not waive their fees, arguing that the market conditions had made it very difficult to meet redemptions at reasonable prices. It could be argued that the two cases are different: property funds had been the victim of an external shock whereas Woodford’s problems are manager and firm-specific. For example, Standard Life UK Property suspended dealing in its fund on July 4, 2016, and re-opened it in October.
Morningstar’s UK director of fund research, Jonathan Miller, said that a fund suspending trading is “actually very rare”.
The Woodford Equity Income fund is currently suspended for the minimum terms of a month, and as the FCA chief executive has stressed, the manager has “his work cut out” to get the fund back to health. He added that the worst outcome for investors would have been a “disorderly” fire sale of assets to meet redemptions.
At the time of last week's suspension, the FCA said in a statement: "A suspension should last no longer than necessary to allow the fund to build up sufficient liquidity to meet redemptions again."
