The Run on Neil Woodford and the Position of the ‘Retail’ Investor

The business press has been awash with articles concerning the fallen investment star Neil Woodford, who suspended withdrawals from his Equity Income Fund on Monday. As part of these reports, a number of issues have been raised ranging from the protection afforded by the regulator – The Financial Conduct Authority – to the role of so-called investment ‘supermarkets’ like Hargreaves Lansdown. In this post we will look at these issues but focus mainly on the conceptual role, or identity, of the so-called ‘retail investor’.

Neil Woodford, best known for his time at Invesco Perpetual, started the Equity Income Fund five years ago and, even upon its launch, was placed in Hargreaves Lansdown’s ‘Wealth 50’ list. Hargreaves Lansdown, which ‘issues recommendations about which managers to back to an army of retail investors’ has since suffered the consequence for maintaining Woodford’s place on that list, even up until the fund had been suspended, as its shares dropped 4% on news of its support for the fund. However, Hargreaves Lansdown 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”’, to which Head of Investment Emma Wall added that the group advocates for long-term investing and had backed Woodford for his ‘compelling’ track record. The FCA supports this model of investment advice, with a report earlier this year declaring that investment advisors such as Hargreaves Lansdown tended to ‘help investors’. Yet, this does not mean the 4% dive will be the end of the story for Hargreaves Lansdown, with the company updating its clientele only last month with the declaration that ‘we retain our conviction in him to deliver excellent long-term performance’. The business press, and the Financial Times in particular, have been particularly direct with their criticism of the connection between the two entities, stating that Hargreaves’ clients once held up to 38% of Woodford’s fund, and even when problems started to arise this did not drop to less than 28% - the inference being that Hargreaves Lansdown was essentially Woodford’s ‘agent’ and was far too invested in the fund to be impartial and objective. Commentators have suggested, as a result, that the reputational hit that Hargreaves Lansdown will take may be substantial.

However, if we look closer at the reports then there is an underlying theme that is promoted time and time again. One external analyst fears that ‘retail investors who followed the Wealth 50 recommendations and invested money with Mr Woodford would react angrily’, whilst The Independent confirms that Woodford was feted as ‘someone who could consistently deliver big returns for large numbers of retail investors’. Others have chosen to focus on the FCA and ask whether its regulations are ‘fit for purpose’ given that its regulations ‘facilitate the sale of risky funds to people needing to withdraw cash’. The theme is that it is ‘retail investors’ who will lose out here and who are, by conception, vulnerable. There are a number of difficulties when attempting to categorise a ‘sophisticated’ investor and an ‘unsophisticated’ investor, because in some senses it is subjective and in other senses enshrined in various laws and regulations in order to govern the investment capabilities of said entities. As an aside, it has been noted that the ‘golden ticket’ in the Financial Crisis was to sell the most sophisticated of financial products to the least sophisticated of investors, which again hints at this inherent vulnerability of unsophisticated, or as they are better known, ‘retail investors’. Regulators are purposefully created to protect retail investors, as demonstrated by the FCA’s recent capping on the amount of money retail investors can put into the peer-to-peer lending system. So, whilst not universal, retail investors are to be protected because they do not, by conception, have the resources, knowledge, or perhaps wherewithal to protect themselves from the iniquities of the marketplace, or at least against massive losses. It was therefore very interesting to see that Kent County Council, who hold more than a quarter of a billion pounds (£263 billion) in the fund, are now trapped in the fund and have gone public with their attempts to be granted an exemption by Woodford to have their funds returned. This should lead to the question of whether Kent County Council are ‘retail investors’, or whether they should have the resources (which is the main argument) or the capacity to protect themselves more. Furthermore, why should they be given priority over other shareholders? If it is the case that they represent members of the public, then the question is raised whether such institutions should be allowed to invest in such investment vehicles. It has been noted in the press that the Bank of England is monitoring the situation closely regarding fears over contagion, which leads us back to a number of posts regarding the concept of ‘too big to fail’ – or in this case, perhaps it is ‘too public to fail’. This is a real issue and one that is demonstrative of inherent contradictions within the modern marketplace. When Councils are allowed to invest their resources on the open market, for which leading councillors, and associated financiers, are rewarded heavily but then there is the prospect of a public bailout (or at the least a public intervention), the parameters are fundamentally distorted. More broadly, is it unfair to suggest that ‘retail investors’ invest their money willingly and should be made to pay the ultimate price for their decision? If it is the case that people do this in order to chase higher returns than what is available via the depositor-insured banks – Woodford’s fund started by offering returns much greater than any savings account – then should they be protected? Perhaps this is the demonstration that we live in an era defined by socialist capitalism, whereby risks are absorbed by the public and not those initiating that risk-based process.  

Keywords – investing, Neil Woodford, Business, society, @finregmatters