Funds Still Pushing Back On Full Transparency

Fund manager Neil Woodford has for a long time been put on a pedestal as one the UK’s ‘rock star’ investment managers. And for good reason. Over many years, first in his role as manager for the Invesco Perpetual Income and Invesco Perpetual High Income funds, and latterly as head of his own asset manager, Woodford Investment Management, he has consistently outperformed the market. However, he has recently come under significant pressure for the first time in his career.

A period of underperformance has seen investors redeeming their holdings in his flagship Woodford Equity Income fund, shrinking it to half of its peak size of £10.2 billion of assets under management, achieved in May 2017. That outflow of capital and the decisions it has forced Woodford to take are now coming home to roost. Earlier this year the fund sold off unquoted shares in online stockbroker AJ Bell. While officially explained as an ‘investment decision’ it is an open secret that Woodford’s hand was forced by the level of investor redemptions. To add salt to the wound, the buyer, Woodford’s old Investco Perpetual Income whose original holding Woodford acquired himself, will now benefit from the windfall of an upcoming ICO.

One of the biggest pressures Woodford’s funds are currently under is investor scrutiny of their holdings. His policy of complete transparency means that a full breakdown of investment stakes the funds hold is published monthly. With things temporarily not going particularly well, investors and critics are pulling his picks apart.

Woodford’s transparency is unusual in the fund world. Most funds will only publish details of their top 3-10 holdings from a total of up to 100 or more. There are a couple of reasons put forward for that. The first is not wanting to tip off competitors while building up stakes or generally allowing the wider market to see the detailed composition of funds. The second is avoiding the kind of disruptive scrutiny Woodford is currently subject to when things are not going well. If Woodford’s stake in AJ Bell had not been transparently declared it probably wouldn’t have been first in the firing line to be sold and held onto for several more months would suddenly have transformed into a major winner.

The FCA, who regulates UK-based funds, provides no clear directives on the level of transparency funds need to offer around their holdings breakdown. Which means it’s a decision taken by individual funds. For those investing online in funds there are also conflicting reasons to prefer greater Woodford-esque transparency or to be happy with the status quo. In theory, greater transparency that allows investors to know exactly what they are invested in makes sense. Practically speaking, it might hurt the performance of funds if investors start jumping up and down when they disagree with a pick, forcing the fund to sell of risk redemptions. If investors had shown trust in Woodford’s AJ Bell holding, it would have paid off and contributed to improved performance.

With arguments on both sides, fund transparency, or the lack of it, is likely to be an ongoing debate.