Research shows devastating financial and emotional impact of Woodford collapse
– Plans for Long-Term Asset Funds (LTAFs) must take lessons into account
– Limited number of investor case studies available
The Association of Investment Companies (AIC) has released the findings of research into the impact of the collapse of Woodford Investment Management on private investors.
The findings are highly relevant given the investment industry’s plans to launch Long-Term Asset Funds (LTAFs), a new open-ended fund structure that would be allowed to have far greater exposure to hard-to-sell illiquid assets than was permitted for the Woodford Equity Income fund1.
The research2, conducted by Research in Finance, shows that 86% of Woodford investors who were impacted by the suspension of Woodford Equity Income in June 2019 suffered a negative impact on their finances, while 53% reported a negative impact on their general well being.
Investors were left feeling shocked, helpless and angry. One affected investor described the suspension of Woodford’s flagship fund as “a bolt out of the blue”, while others used phrases like “sick to the stomach” and “bad on top of bad” to describe their feelings on hearing the news.
Trust in the investment industry remains dented more than two years after the suspension. Of respondents who were affected by the suspension, 77% reported a negative impact on their trust in the investment industry. A total of 81% of private investors believe the FCA should strengthen protections for investors where illiquid assets are held in open-ended funds.
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “The collapse of Woodford Investment Management two years ago shook the entire investment industry, and we are still dealing with the aftershocks. This research reminds us of the financial and emotional impact on individual investors, which is still being felt.
“Everyone in the investment industry has lessons to learn from what happened, and as an industry we clearly still have our work cut out to restore trust. In the circumstances, it is vital that the launch of Long-Term Asset Funds (LTAFs) does not lead to any kind of repeat of this disastrous episode.
“To prevent investors getting burned again, the LTAF must be based on robust regulatory standards and should not be accessible to the general public. Broad distribution of the LTAF before it is tested through an economic cycle risks exposing investors to fire sales of assets, suspensions and fund failures which can arise from liquidity mismatches, as we saw with Woodford Equity Income.
“We wholeheartedly support the FCA’s Consumer Investment Strategy objectives seeking to increase the levels of investment amongst private individuals, but to increase consumer engagement with markets it is vital that investors have confidence and trust.”
Financial and emotional impact of the suspension
The financial impact of the suspension of Woodford Equity Income on some investors was severe. One investor reported that she will have to work for an extra two years to make up the losses on her investment. Another commented: “It appeared that I had lost much of my pension. Also I felt badly in having advised my daughter to invest her pension in the fund. It has put her off investing for life.”
Many investors reported suffering emotional distress. One said: “It had a huge financial and emotional impact. It left me feeling very angry and powerless and helpless and left me with the impression that the decision to suspend was not taken in the best interests of the many private investors.”
How did it happen?
The AIC’s research casts light on why private investors entrusted their money to Woodford Investment Management. The reputation of Woodford himself was the most influential factor, cited by 82% of investors in Woodford’s funds. This was followed by the inclusion of the fund on Hargreaves Lansdown’s buy-list (56%) and coverage in the finance sections of newspapers (31%), with the appeal of the fund’s investment objective or strategy in fourth place (25%).
Among investors in Woodford’s funds, 83% were not fully aware of their exposure to small, unlisted companies, while 20% were not aware at all. And among all private investors, over a third (34%) were unaware of the possibility that an investment fund might suspend trading.
Lessons learned from Woodford
The most common lesson learned by private investors from the Woodford collapse (including those unaffected as well as those affected) was to be less trusting of a fund manager’s reputation, with 59% of respondents saying this. This was followed by an increased preference for using investment companies (38%).
- The Woodford Equity Income fund operated under UCITS rules, which permit a maximum of 10% of a fund’s assets to be invested in less liquid assets such as unlisted securities. The FCA’s consultation paper CP21/12 on the proposed Long Term Asset Fund (LTAF) specified that the regulator would expect more than 50% of an LTAF’s assets to be invested in unlisted securities and other long-term assets.
- This research was conducted by Research in Finance and commissioned by the AIC. It consisted of an online survey of 205 private investors. Of these, 159 had invested in a fund run by Woodford Investment Management, and 100 were impacted by the suspension of the Woodford Equity Income fund. The survey was supported by ten in-depth interviews with selected respondents to the online survey. The fieldwork was conducted between 16 June and 9 July 2021.