Surely no one can be more horrified by the events of this week than Neil Woodford himself. It must be a brutally bitter pill to follow for someone once dubbed “the man who can’t stop making money”.
The entire debacle is a painful example of how checks and balances often just don’t work in the finance industry.
We Need More Checks and Balances
Woodford’s portfolio was too illiquid and inappropriate for an open-ended fund, but he was entirely clear from the outset that this was the plan. One of the main reasons he set up his own company was to pursue his passion of investing in early-stage companies.
So, it’s quite hard to fault the transparency of the firm – although one can certainly raise an eyebrow at some of the unusual steps the team had taken in recent months (swapping holdings with their own investment trust and listing stocks on the Guernsey exchange, to name just two).
Woodford Investment Management itself has some serious questions to answer. Where, for example, was the risk and oversight to challenge the manager’s decisions and step in when the proportion of unquoted stocks was getting too high?
But the FCA must also shoulder some of the responsibility. The regulator’s rules are that a fund can have no more than 10% of its portfolio in illiquid assets. It’s hard to get a precise figure but, at times, Woodford Equity Income was hovering around the 16% mark. Why didn’t the regulator step in to enforce its own rules?
And questions must also be asked of the fund supermarkets that put Woodford’s fund on their best buy lists even as it had barely even launched. The argument was that the manager's stellar 30-year track record earned him his place. But running a business is very different from running a fund, and Woodford had no track record in doing so. Having free rein at your own fund house is also very different to operating as part of a huge team at a fund giant. At best it was optimistic of platforms to start promoting the fund from the outset, at worst it was downright irresponsible.
And what of the thousands of investors who blindly followed the manager to his new venture, investing billions of pounds of their hard-earned savings? Yes, many will have simply followed the advice of an adviser or trusted the best buy list of their fund supermarket, but that’s not an excuse. If you’re willing to hand over your savings to a fund manager without checking the strategy or monitoring the portfolio then you must accept some portion of the blame when it doesn’t turn out as you’d hoped.
While the Woodford situation may take weeks or even months to unravel, if the upshot is that lessons are learned by all then at least something positive can be taken from it.
P2P Crackdown
The FCA announced its new rules for peer-to-peer investments this week. Individuals will only be able to invest up to 10% of their assets into P2P under the new rules, unless they are taking financial advice, and platforms will have to do more to assess customers' knowledge and ensure they understand the risks.
It's good to see the regulator being proactive in this space but thousands of Lendy customers waiting to hear what's to become of the £160 million owed to them might argue it's too little, too late.
And the Award For Worst Idea of the Week Goes to…
MP James Brokenshire, congratulations!
The UK has a perilous problem with under-saving for retirement – to say most of us aren’t setting enough aside for the future is to grossly underestimate the situation. We also have a worryingly unhealthy relationship with property, operating under the nonsensical belief that it is somehow an alternative to saving.
James Brokenshire’s suggestion this week that people should be able to raid their pension pot to use a deposit for a home will do nothing but exacerbate both of these issues.
It will drive house prices higher, making it even harder for the next generation to get a foot on the ladder (prompting more bonkers ideas, no doubt) while robbing our pension pots of the vital time they need to compound and grow in order that we might possibly dream of retiring one day.
MPs need to stop perpetuating the dangerous myth that properties and pensions are the same thing. They are not: one is for living in and one is for living off.
