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ETFs step up as Woodford fund suspension incurs lasting effects

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ETF providers and users have had a good week demonstrating the superior advantages of their wrap around structure as the financial news in the UK has been dominated by the gating of former star stock picker Neil Woodford’s Equity Income Fund.

The GBP3.7 billion – at its peak – fund, much loved and promoted by fund platforms, had suffered a 30 per cent under performance over two years which presumably lay behind the fated decision of   Kent County Council to ask if it could withdraw its GBP236 million investment.

Leafy Kent and its county council were the unlikely cause of an instant gating, a phenomenon more common in the hedge fund world post 2008. The irony for the ETF world is that the Woodford fund had been heavily supported by fund platforms, the very platforms that struggle to offer ETFs. One of the most affected firms is Hargreaves Lansdown, which had kept the fund on its Wealth 50 preferred list right up until it was suspended.

The firm has apologised to investors with Chief Investment Officer Lee Gardhouse writing: “We share the disappointment and frustration investors in Woodford Equity Income feel at this time and would like to apologise to all clients who have been impacted by the recent problems. And, once the dust settles, we will undertake a thorough review of what happened and see what lessons can be learned.”

Those lessons are going to be repeated across the platform-based investment community in some sort of investment detention session. And things will get worse. The FCA is being called upon to explain its handling of platforms and the lawyers are girding up their loins, aware that potential litigation is on the horizon.

There is a clear conflict of interest for platforms that make money out of funds they promote. The Financial Times quotes Citywire in its reckoning of the fees that Hargreaves and Woodford have made, writing: “It reckons Woodford made GBP50 million in fees from Hargreaves clients in three years. Hargreaves’ own cut would have been not much less.”

The ETF industry has waded in, pointing out the liquidity of the sector, the transparency, the lack of star managers and the low fees. Robo-adviser Nutmeg urged the FCA to revisit best buy fund lists, and question whether they are acting in the best interests of consumers.

Nutmeg’s chief investment officer, Shaun Port, says: “The impact of the trading suspension on Neil Woodford’s Equity Income Fund is much further reaching than just one fund. While investors who bought the Woodford fund based on the recommendations of a best buy list are left wondering when they will be able to redeem their investments, it calls into question the broader appropriateness of best buy fund lists. As the Financial Conduct Authority highlighted in their 2017 study, there are concerns around links between funds on best buy lists and the platform providers as well as their performance over the long-term. It’s time the regulator revisited best buy fund lists and whether they are acting in the best interest of consumers.”

Meanwhile, ETF white labelling firm HANetf published comments under the title: “Wake-up Call”, with Hector McNeil, co-Founder and co-CEO, saying: “The gating of the Woodford fund should be a wakeup call to all investors. We have long argued that intra-day liquidity is a huge advantage that ETFs offer over traditional funds – regardless of market conditions, an investor can trade in and out quickly and get their money back – something possible with the many Equity Income ETFs that are now available.

“Having paid significant fees for underperformance, Woodford’s investors are now having salt rubbed into their open wounds as they cannot get their money back to redeploy. Given regulatory and investor focus is shifting towards value for money and investor protection, this incident could be the wakeup call that catalyses wholesale investor migration towards ETFs. As an industry, we have argued that ETFs are a superior distribution technology because they offer transparency, liquidity and market access at low costs, and it is exactly these features that many Woodford investors now wish they had – the transparency to know about unlisted and illiquid securities risk and the liquidity to trade and exit at a time of their choice.

“The disciplines of running an ETF make a scenario such as this remote. There has been much speculation in the press around ETFs and what would happen in times of volatile markets. It’s interesting that such an event as what has befallen Woodford if it had been in the ETF world would have been seen as catastrophic. ETFs almost universally have liquidity screens to prevent such events and investors should use this event as a wakeup call.

“Following on from Terry Smith’s recent emerging market woes it is very evident that the star fund managers business models are under significant stress and helps highlight the clear benefits of the ETF wrapper.”
 
 

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