The near-collapse of an investment fund that few people will ever have heard of is sending shudders through the City of London.
The troubles facing Neil Woodford’s Equity Income Fund could have disastrous consequences for working class people.
Such funds invest the wealth of individuals and firms. It's big business—Britain's asset management sector handles £8 trillion.
The funds are seen to offer a much higher rate of return than a boring savings account because of the “brilliance” of their managers.
And, of course, those at the top take a slice of the profits for themselves.
In 2014 Woodward launched a new company with the backing of supporters at Hargreaves Lansdown, one of Britain’s biggest investment companies.
Merryn Somerset Webb, MoneyWeek editor writes in the Financial Times newspaper, “The hype was huge.
“Mr Woodford launched Patient Capital, an Equity Income Fund, an Income Focus Fund and a super snazzy website with lots of stuff about him on it (‘widely regarded as one of the finest investors of his generation’).”
All went well at first as the Equity Income Fund took in around £10 billion, seeing its share price soar.
Then it all went wrong.
In an effort to drive up profits, Woodford started to put money in companies whose shares are not bought and sold on mainstream stock exchanges. This makes it hard to turn the shares into cash quickly.
When people came calling for their money, it wasn’t actually in the bank. The Equity Income Fund is down to £3.7 billion—“a number it is only hanging on to by refusing to let anyone else take their money,” says Webb.
Although suspended, the fund is still taking in £100,000 in fees a day.
Bosses in the City of London are worried that problems will spread from one fund to another. Several other pension fund providers have now frozen investor withdrawals from funds that offer similar products to Woodford’s ones.
Woodford’s fund management empire has sold or transferred close to £600 million of stock this week. “This is categorically not a fire sale,” said a Woodford spokesperson, fueling fears that this was indeed an emergency sell-off.
Woodford himself is unlikely to feel the pinch.
Last year a £36.5 million dividend was paid from the fund to Woodford Capital, controlled by Woodford and his business partner.
Webb concludes, “A lot of people will tell you that Neil Woodford has been a victim. A victim of Brexit. A victim of overly prescriptive regulation. A victim of the media.
“But either way, he is a very rich victim indeed. Someone’s made a huge pile of money since 2014. You were told it could be you. It’s actually been Neil Woodford.”
It’s not just fellow financiers who should be concerned. Kent County Council pension fund has £263 million invested in one of Woodford’s funds. It was a request for the money’s return that triggered its suspension.
The Unison and GMB unions said they have received a “steady stream” of calls from concerned council workers and the 135,000 pension fund members.
“People don’t know where their money is going and how much is being spent on people who are telling us where to put that money,” said Unison regional organiser Ryan Slaughter.
“There is no trade union representation at board level and there is no transparency over what fees are being paid to fund managers.”
The council has form for troublesome investments, including a £50 million deposit in Icelandic banks that were placed in jeopardy by the financial crisis in 2008. It took nine years to get its money back.
Perhaps in the end the fund’s woes will be staunched and everyone will go back to making profits.
The whole episode demonstrates that the supposedly beefed-up regulation after the 2008 financial crash is wholly ineffective.
Andthe wider fears about the world economy are not going away. That’s why every such event is scrutinised in case it is the one that might set off a bigger crisis.