Behind every superstar is a Mr 10 Per Cent — an agent who secures top-billing in return for a cut of the box office. And in the case of Neil Woodford, fallen superstar of UK fund management, that agent was undoubtedly Hargreaves Lansdown, the online investment platform. On paper, Hargreaves was only a Mr 0.45 Per Cent — the cut it took from investors’ ticket money. But the fact it kept promoting Mr Woodford’s Equity Income fund, right up until he said he could not go on giving punters’ their money back, prompts a question asked of less-reputable middlemen: did Hargreaves keep taking fees at the expense of now-disillusioned fans?

A 4 per cent fall in Hargreaves’ share price on Tuesday suggests the market holds it partly responsible for a debacle that has trapped up to £2bn of clients’ cash in the now-suspended Woodford Equity Income Fund.

Hargreaves certainly played its part in bigging up Mr Woodford’s fund and burnishing his image. When he left Invesco Perpetual after 25 years and a string of hits — “Buy Tobacco” and “Avoid Dotcoms” were among those that helped him achieve a 2,300 per cent return — Hargreaves became lead publicist for his solo career. By including his new income fund in its top 50 chart from launch, the platform drew legions of followers. According to Citywire, Hargreaves clients grabbed 38 per cent of Mr Woodford’s flagship fund in its first full year, 2015. Even as his performance faltered in 2017, Hargreaves persuaded them to hold 28 per cent.

How? By keeping Woodford Equity Income in its Wealth 50 listing — even though the fund was falling to the bottom of performance-based charts and holding illiquid securities many didn’t like the sound of.

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Hargreaves has always said its Wealth 50 is not a list of the most popular investments, but simply its “preferred” funds based on “management and low charges”. As such, it dances to the right regulatory tune: it is not offering financial advice. However, it gives the impression of ranking the top 50 funds for investors, when they are arguably only the top 50 for Hargreaves itself. Funds are typically included on the basis that they will give discounts on their own charges, to promote sales. Mr Woodford’s Equity Income fund cut its annual management charge from 0.75 per cent normally to 0.5 per cent for fans on Hargreaves’ platform. Funds that refuse to discount are conspicuously absent from the Wealth 50 — even though they may be bought direct for no more than Hargreaves charges for its favourites. Woodford Equity Income cost 0.5+0.45=0.95 per cent a year via Hargreaves. But better performing funds cost 0.7-1 per cent direct. Fans keep buying from the Wealth 50, though.

Why? Because investment platforms are as flawed as the idols in their hit parades.

They are still allowed to showcase certain managers while claiming to serve consumers. Yet they cannot do both, as proved by the ludicrous spectacle of Hargreaves dropping Woodford Equity Income from its Wealth 50 only after trading in the fund was suspended. Citywire suggests why they try, however: it reckons Woodford made £50m in fees from Hargreaves clients in three years. Hargreaves’ own cut would have been not much less. And who allows this? It is the Financial Conduct Authority that decides what constitutes investment advice and oversees the sale of illiquid funds to retail investors. So it is the FCA that must ask itself if regulations that facilitate the sale of risky funds to people needing to withdraw cash are fit for purpose.

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As investors have realised, this is not a question the FCA asks too often. In fact, the last time it imposed a big fine on a fund group for breaching risk and disclosure rules was in 2014. That supergroup? Invesco Perpetual. And its star fund manager up until then . . .?

Woodford: biter bit

Fund suspensions are poisonous when used by managers to stop rattled investors forcing the sale of illiquid assets in chaotic markets, writes Kate Burgess. The “gates”, “windups”, “side-pockets” that follow sound as snakelike as sidewinders and garters. And to investors, they are.

Neil Woodford, who suspended dealings in his Equity Income fund on Monday, may opt simply to wind up its portfolio. But the process won’t be simple. It could take aeons to flog holdings in private companies and stock market titches such as Itaconix, Synairgen, Xeros and Eve Sleep. It took nearly a year for Gam of Zurich to wind its absolute return bond fund down after suspending redemptions last year

The Gam brand was knocked but survives. Its bond fund was one of many. The Woodford name is more akin to the hedge fund stars who lit up the firmament before the financial crisis and then crashed in 2008-09. Remember RAB Capital? Many never recovered. If they still operate, they slip around on the fringes of the financial services industry. They are called ugly names by erstwhile backers peeved at being deprived of their liberty to take cash out at will.

The use of side-pockets, into which fund managers parked unsellable assets while handing investors untradeable IOUs, led to lasting bitterness, sometimes lawsuits. Hedgies said they prevented patient investors who hadn’t rushed for the exit being left holding the least liquid assets. Investors bite back that hedgies used side-pockets to avoid crystallising low prices for rubbish and inappropriate assets and as a ploy to make performance of their main portfolios look better.

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The rhetoric from poisoned ex-Woodford fans will be as venomous. His name will struggle to recover.

matthew.vincent@ft.com
kate.burgess@ft.com



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