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Can Neil Woodford ever recover from the fund suspension scandal?

There’s no doubt the suspension of trading in Neil Woodford’s Equity Income fund is an absolute debacle. Investors can’t get their money out of the fund at present and regulators are now taking a closer look at what’s gone on. Meanwhile, his reputation appears to have been permanently tarnished as a number of institutions have dropped him as the portfolio manager of their funds. Can he ever recover from this?

Woodford got it all wrong

To my mind, the biggest problem with Woodford – aside from his diabolical performance – was a serious lack of understanding in relation to what his investors were looking for.

You see, his flagship fund was marketed as an ‘Equity Income’ fund. Now, generally speaking, people that invest in these funds are often in the consolidation phase of the investor lifecycle and are thinking ahead to retirement, or perhaps even already retired and are looking to generate income. Either way, these kinds of investors are generally looking for capital preservation, blue-chip stocks, and dividends.

Yet an inspection of Woodford’s fund revealed it was actually nothing like an equity income fund. Stuffed full of risky small-caps and unquoted companies, the fund resembled a rogue combination of a ‘special situations’ fund, a high-risk small-cap fund, and a private equity vehicle.

While we did warn investors the fund looked dangerous, there will be many investors who had absolutely no idea it was invested in such an unorthodox style, and will have only found out when the fund was suspended. As a result, many people are likely to feel betrayed and he will have lost a great deal of trust within the investment community.

Unethical behaviour

Making matters worse is the fact that Woodford has refused to waive his fees in the wake of the fund suspension, despite pressure from a number of stakeholders. So, while investors are barred from accessing their funds, he and his team are still raking in around £100,000 per day in fees.

This isn’t a good look for the investment management industry and is likely to anger investors even more. Who would back the fund manager with their money after this behaviour?

Back to basics

However, in support of Woodford, the portfolio manager has said he’s going to completely reposition the fund while trading is suspended and focus more on liquid FTSE 100 stocks in the future.

This is worth noting because it was these kinds of stocks that Woodford built his ‘star manager’ reputation around. Over the course of his career at Invesco Perpetual, he turned £10,000 into nearly £250,000 by investing in large-cap value stocks. Going forward, if he sticks to his area of expertise, I think there’s a good chance he will be able to generate robust returns for investors.

So overall, Woodford has a lot of work to do now to rebuild his reputation. He’s likely to have lost a lot of trust, and when it comes to money, trust is everything. However, if his Equity Income fund is completely overhauled and repositioned into FTSE 100 stocks, and he shows he’s capable of outperforming again, there are likely to be plenty of investors who will back him.

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