Investors in the Woodford Equity Income Fund are to receive redress nearly four years after the fund’s suspension.
The Financial Conduct Authority has concluded its investigation into Link Fund Solutions, the fund’s authorised corporate director, with an agreement that £235mn will be paid to investors following “critical mistakes and errors” it made in managing the strategy’s liquidity.
The FCA had originally estimated LFS’s liquidity management failures to have resulted in losses of £306mn, but in a statement on April 20 the regulator said this was substantially greater than the company's remaining assets.
While it will take some time for this redress process to complete and for payments to be made, investors are one step closer to being able to finally put this whole sorry episode to bed.
Ryan Hughes, AJ Bell
Link Group, LFS’s parent company, will make a voluntary contribution to the redress as it considers it has no legal responsibility for the obligations of LFS.
The redress payment is made up of LFS’s assets plus part of the proceeds from the sale of LFS (without the Woodford liability) to Dublin-based Waystone Group.
In its investigation, the FCA said that as authorised corporate director, LFS had responsibility for ensuring the fund operated with appropriate liquidity risk management and controls, and that all investors were treated fairly.
The watchdog considers that LFS made critical mistakes and errors in managing Woodford Equity Income’s liquidity, with the result that the fund failed to have a reasonable and appropriate liquidity profile from September 2018.
The FCA said that by November 2018, this failure meant that investors leaving the fund from that point onwards “benefited disproportionately” from access to the most liquid assets in the fund that were sold.
Those who continued to hold investments in the strategy at the time of its suspension in June 2019 were treated unfairly as they had a disproportionate share of the remaining assets, which were more illiquid, the watchdog said.
Woodford: what happened?
Former star manager Neil Woodford’s flagship Equity Income Fund had been struggling with outflows, which were running at a net £9mn per working day in May 2019.
A month later Kent County Council asked to withdraw all of the £250mn it had invested with him through its pension fund, and Kier Group, one of the fund’s substantial holdings, announced a profit warning that prompted its shares to plummet by 40 per cent.
This triggered the fund’s suspension on June 3 2019. Woodford was then scrambling to sell shares to improve the fund’s liquidity in an effort to pre-empt a wave of redemptions when the fund reopened.
But on October 15 2019, it was announced that Woodford’s suspended Equity Income Fund, initially touted to reopen in December, would be wound down and Woodford fired from the fund.
He then walked from his remaining two investment vehicles before confirming he had taken the decision to close Woodford Investment Management later that day.
The sale of LFS will generate up to £140mn in proceeds. The FCA has received information from Waystone and assurances from LFS and Link Group that this represents fair value.
LFS’s assets include up to approximately £80mn in net proceeds from selling its business, together with a contribution of up to roughly £60mn from the sale by Link Group of the rest of its Fund Solutions business.
Link’s contributions are dependent on the approval of the investors in the fund entitled to redress, and will also require court approval.
If the full amount is paid to investors, they will have recovered approximately 77p in the pound. But the redress does not include investment losses that may have arisen as a result of any poor financial performance of the investments held by the fund.
‘FCA’s investigation raised serious concerns’
FCA executive director of enforcement and market oversight Therese Chambers said: ”The FCA’s investigation raised serious concerns about Link Fund Solutions’ management of the liquidity of the Woodford Equity Income Fund.
“LFS’s actions appear to have caused significant losses for those investors who remained in the fund when it was suspended.
“We believe the proposed scheme offers investors the best chance to obtain a better outcome than might be achieved by any other means, and it is in the investors’ interests they be given the chance to consider it.”
The FCA said other parties are still under investigation in relating to “the circumstances that led to the suspension” of the fund.
AJ Bell head of investment partnerships Ryan Hughes said the news would come as “significant relief” for investors who have been “very patiently waiting” for some form of compensation.
“While approval of this redress scheme with Link would close the case and liabilities against them, the FCA points out that this remains a live investigation, with other parties remaining under investigation," he said.
“As a result, the Woodford drama will drag on past the four-year mark, but many investors will no doubt be glad that significant progress now looks to have been made.
“While it will take some time for this redress process to complete and for payments to be made, investors are one step closer to being able to finally put this whole sorry episode to bed.”
This article originally appeared on FTAdviser.com
