23 August 2019 by Chris Barnes FCIS
The case of the Woodford Equity Income Fund reaffirms the importance of good governance
On 3 June 2019 Woodford Equity Income Fund’s Authorised Corporate Director, Link Fund Solutions Ltd, announced that trading had been suspended. The intention was to protect the existing investors in the fund by allowing the fund manager, Neil Woodford, time to reposition the unquoted and less liquid stocks element of the fund’s portfolio invested into more liquid investments.
This was an all-time low for a fund with its star fund manager, listed by Hargreaves Lansdown in its Wealth 50 best buy list. With assets under management totalling £10.2 billion at its height in May 2017, the Fund closed to redemptions at £3.7 billion, amidst allegations of improper conduct and with an FCA investigation pending.
The Woodford Equity Income Fund is an Undertaking for Collective Investments in Transferable Securities (UCITS). Regulated by the Financial Conduct Authority, its rules are set out within a number of sourcebooks, in particular Collective Investment Schemes (COLL), and are usually formed under an umbrella company, called an Open Ended Investment Company with variable capital (OEIC). OEICs are required to have at least one director; this is normally an Authorised Corporate Director (ACD).
OEICs are open-ended, meaning that when an investor purchases shares, more shares are created, and when sold, the shares are taken out of circulation. The investor can redeem their shares whenever they wish but the fund manager may be required to sell from the underlying portfolio to meet the demand.
The ACD is responsible for the governance of the OEIC and its underlying funds. As a company it must adhere to standard legal requirements, but also the OEIC Regulations 2001, the OEIC’s Instrument of Incorporation, the Prospectus and COLL. Central to the ACD’s regulatory responsibilities is to pay due regard to the interests of the fund’s shareholders and to treat them fairly.
The ACD is also the Authorised Fund Manager but is permitted to delegate this and other activities to third parties, whilst retaining ultimate responsibility. In the case of Woodford Equity Income Fund, fund management was delegated to Woodford Investment Management Ltd, of which Neil Woodford is director.
To ensure the ACD’s effective oversight, it is required to:
Good governance starts with a robust board of the ACD with the company secretary as a crucial conduit. The board must organise its affairs in line with best practice: actively monitoring its conflicts of interest, remuneration and succession planning. It must be kept abreast of regulatory changes and its training must be kept up-to-date.
The company secretary will align the interests and concentrate the flow of relevant and accurate information between the ACD and the business, aided by regular board meetings, timely board reports and matters arising cascaded to the business. He will help the board of the ACD fulfil its responsibilities to the shareholders and the Regulator through regular reporting and active engagement. He will monitor matters reserved for the board and matters delegated by the board. There should be clearly defined terms of reference for internal committees, and annual reviews of external delegations. ACD-approved policies and procedures should be adhered to.
Liquidity is the responsibility of the ACD which should establish and ensure the adherence to, liquidity management measures. Since the Woodford Equity Income Fund’s zenith in 2017, there was Regulatory scrutiny over Neil Woodford’s investment methods, in particular around the Fund’s exposure to unlisted securities and increased illiquidity, which ultimately resulted in its suspension. These factors indicate a less than robust approach by the ACD in providing the requisite oversight of its delegations.
This case has the shown the critical importance of the promotion and practice of good governance by boards over the funds that they manage, in order to enhance trust and confidence, to the reputational benefit of the asset management industry as a whole.