Time finally ran out on Neil Woodford, Britain’s most high-profile fund manager, as he was forced to suspend dealing in his flagship Equity Income fund.
The unprecedented move followed months of withdrawals by investors that caused his fund, once worth £10.2bn, to shrink to just a third of that size today. Now pressure is building on the City watchdog to reform its rules governing funds, particularly around the holding of “illiquid” assets.
Investment experts are also predicting that Mr Woodford’s spectacular downfall will push more investors towards “passive” funds run by algorithms rather than humans.
Others may have lost faith in managed funds entirely, preferring to go it alone and pick their own stocks or join the millions who leave their money in cash.
So what went wrong?
Mr Woodford’s troubles were caused by his holding of a significant number of small, difficult-to-trade companies, some of which were unquoted.
As redemptions increased, he could raise the sums of money demanded by investors only by selling his liquid assets, which made the unlisted ones account for an ever larger percentage of the portfolio.
The fund ended up testing the 10pc regulatory limit on unquoted holdings and in the end suspending dealing was his only option.
Peter Sleep of Seven Investment Management, a rival fund house, said: “I think the governance of British funds might be tightened as a consequence, as there were some clear failures here.”
He also was the victim of his own attempt to provide investors with more information. He listed his entire portfolio on his website in an attempt to improve transparency, but this was prayed on by short sellers (those betting that his stocks would fall).
When redemptions picked up, he was forced to sell, causing a vicious cycle he could not escape from. Since then he has reduced the access of his investors to just the top 10 holdings, in line with the rest of his peers.
While property funds have closed their doors in times of stress, as selling properties can take time, never before has a mainstream stock market fund run into such difficulty. Investors are still being charged a management fee, and Telegraph Money has called for it to be waived while the fund remains frozen.
This newspaper is also calling for reform of the fund management industry to prevent private investors being pushed towards “open-ended” funds that invest in illiquid assets. Instead, these assets should be held via investment trusts, Telegraph Money says.
What’s next for Mr Woodford? His fund is almost certain to be hit with more heavy selling when it reopens, which is likely to be in a month or more.
James Calder of City Asset Management said: “It takes a lifetime to build a reputation and a very short time to lose it.”
The broader fund management industry will now come under renewed scrutiny, said Tom Sparke of GDIM Discretionary Fund Managers. He said it was understandable that investors would be “spooked”.
Despite saying "sorry" in a video to investors, it remains to be seen whether Mr Woodford's fund can continue after it reopens.
Hargreaves Lansdown, Britain’s biggest investment broker, is another casualty of the debacle. It remained a faithful backer of Mr Woodford until the suspension.
Hundreds of thousands of investors use Hargreaves to manage their pensions and Isas. Many place their money with the firm’s recommended funds, rather than choosing from among the thousands of individual shares and lesser-known funds.
Brian Dennehy of FundExpert, another broker, said: “I hope Hargreaves uses this as a catalyst to change the culture to focus on the clients rather than its relationships with asset managers.”
Since then, chief executive Chris Hill has apologised to clients and the firm has agreed to waive its fee for those invested in the fund. It also announced it is reviewing whether or not to remove the fund from its own multi-manager portfolios when it reopens.
Experts say the crisis could accelerate the switching of money to passive funds rather than active stockpickers such as Mr Woodford.
Robin Powell of The Evidence-Based Investor, an online educational resource, said over the long term active managers failed 99pc of the time.
“Yes, you could pick the right one, but the overwhelming likelihood is that you won’t, and if things go badly wrong as they did with Woodford, it could end up costing you a fortune,” he said.
Credit: The Telegraph