No rival comes close to the astonishing scale of support Hargreaves Lansdown has delivered to Neil Woodford and now more than ever, the under-fire fund manager needs to retain its loyalty.
Funds Insider can reveal the size of Hargreaves Lansdown’s investments in Woodford’s funds for the first time, showing the UK’s largest online stockbroker was responsible for generating more than a third of the inflows.
The Bristol-based behemoth’s imposing marketing machine whirred into action at the launch of all three of Woodford’s funds: first his flagship Equity Income fund, then his Patient Capital (WPCT) investment trust, and a third push in 2017 for his Income Focus fund.
In 2015, the first full calendar year for Woodford Equity Income, Hargreaves Lansdown clients owned a whopping 38%, or £3.1 billion, of the fund. By 2016, that had risen to £3.4 billion, even though their relative stake in the fund had dipped to 36%, after a strong early run of performance for Woodford.
They began to sell in 2017, as Woodford endured a torrid year, falling to the bottom of the Investment Association’s UK Equity Income sector with a flat return.
Hargreaves clients responded by pulling £1 billion from the fund, at a faster rate than Woodford’s other investors. But such is the broker’s scale, and the inflows it had already driven, that at £2.2 billion their clients’ stakes still represented 28% of the fund’s assets.
Over those three years, Woodford would have generated roughly £50 million in fees from Hargreaves Lansdown clients alone.
In the case of the smaller Woodford Income Focus fund, Hargreaves’ influence is even starker. Their clients owned just under two-thirds of the then £703 million fund at the end of January last year, a £457 million stake.
Hargreaves’ backing of these Woodford funds is so significant that the stockbroker is deemed a ‘related party’ in that it controls more than 20% of the shares, and so its holding is disclosed in annual reports. No other broker has this status.
On the shareholder register for Woodford Patient Capital, Hargreaves Lansdown is equally dominant, holding a quarter of the shares, more than any other institution.
Support vital as performance suffers
That backing underlines why Woodford needs to retain the support of Hargreaves while others desert him as performance suffers and the manager faces difficult questions over his holdings in unquoted companies.
Only the manager’s longstanding deal to run funds for national financial advice group St James’s Place (SJP), a mandate that now stands at £3.6 billion, rivals his relationship with Hargreaves in its importance to his still young fund management business.
Even a blow like Jupiter cutting what at its peak was a near-£1 billion position in the Equity Income fund was a setback Woodford was able to shoulder. Hargreaves’ position in Woodford’s funds, at roughly the same time, stood at more than three times the size.
But it’s not just a question of scale: timing is also a critical issue. When Jupiter pulled its investment, Woodford Equity Income, which had already begun to shed assets, stood at £8.9 billion.
Now the fund is around half that size. And as investors have continued to pull money from the fund, albeit at a slower pace now than when outflows were peaking around 18 months ago, it has taken on a different shape.
Funding those redemptions largely from larger, liquid holdings has inflated the relative weighting of Woodford’s unquoted holdings, by their nature less easy to sell. Woodford has meanwhile amassed heavy weightings in some of the Equity Income fund’s listed holdings, which could make them harder to offload.
That leaves Woodford in a position where he could ill afford to lose the backing of a supporter like Hargreaves.
Wealth 50 survival a critical victory
The survival of Woodford’s funds in Hargreaves’ culling of its Wealth 150 buy list, to produce the slimmed-down Wealth 50, was critical, and explains why the manager was willing to cut his already discounted 0.6% charge reserved for the stockbroker to 0.5%.
That list of Hargreaves’ favourite funds has a huge impact on where the £59 billion fund investors hold with the broker ends up. Around half of that is held in funds within the old Wealth 150, and its now-revamped buy list plays a big role not only in determining where DIY investors place their money, but in the investments Hargreaves Lansdown’s own fund managers and financial advisers select.
That’s most visible in Hargreaves Lansdown’s £8.5 billion multi-manager funds business. Woodford funds are held in all of the portfolios whose mandates allow it, amounting to a combined £623 million stake in the Equity Income fund and a £47 million holding in Income Focus.
Woodford’s poor performance has weighed on these funds. The largest, the £2.9 billion HL Multi-Manager Income & Growth fund, also has the biggest weighting to the Woodford Equity Income fund, at 14% of the portfolio. Last month the fund featured in rival stockbroker Bestinvest’s ‘Spot the Dog’ report into underperforming funds, alongside Woodford himself.
Spot the Dog places are reserved for funds that have underperformed their benchmarks over three consecutive years, and by more than 5% over the whole three-year period.
But Hargreaves said that over a longer timeframe fund performance had been strong, outperforming the market 95% of the time over 10 years, and beating the FTSE All-Share by 29% since launch in 2002.
Woodford’s poor performance has tested the loyalty of Hargreaves, which has included funds run by the manager in its buy list ever since the Wealth 150 was launched in 2003.
Earlier this year, as the broker unveiled its revamped fund buy list, Hargreaves Lansdown research director Mark Dampier, confessed ‘I can’t sleep at night sometimes,’ adding that his team ‘agonise over things like Woodford all the time’.
Yet they have maintained their vocal public backing of the manager at a time when others have deserted and criticised him.
Charging differences need smoothing over
The broker’s mild rebuke to Woodford, over the potential for double-charging arising from the controversial swap deal between the Equity Income fund and Patient Capital trust announced last week, is a relative rarity.
‘We are conscious of feedback from some investors, who would like to see us take steps to ensure any future performance fee from the trust does not result in double-charging,’ it said.
Hargreaves has conceded that the prospect of investors in Equity Income, who already pay that fund’s annual management charge, also paying a performance fee for the small proportion of the fund’s assets now held in the Patient Capital trust, is ‘not an immediate issue’.
That’s an understatement: Woodford would need to grow the net asset value from 95p to over 156p by the end of December to earn one this year, and the hurdle will move higher in 2020.
Woodford’s swift response has meanwhile satisfied Hargreaves for now. ‘They’ve said they are going to look at it and we need to wait and see what they say,’ said Laith Khalaf, senior analyst at the broker.
But it highlights a fundamental difference in how the fund group and the broker view the fee. Hargreaves sees it as a charge that Equity Income fund investors would pay, albeit representing only a tiny proportion of the overall charge. Woodford doesn’t: it points to the fact the fee would be paid in shares, and would be immediately accounted for by the net asset value, so not physically paid by the fund.
All semantics, you might say, but a ripple of discontent the fund group would do well to smooth over with its biggest backer.