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What do Neil Woodford’s further troubles mean for Hargreaves Lansdown?

How do you make investing in managed funds sound exciting? That’s a question that must surely make the marketing folk at investment firms shake their heads in the morning and want to go back home to bed.

But then along came Neil Woodford, fresh from his success at Invesco Perpetual, already tipped by many in the UK financial press as the UK’s Warren Buffett, and all set to launch his own new flagship Woodford Equity Income fund.

Companies like Hargreaves Lansdown (LSE: HL) had been handed a gift, and they made the most of it. But while Hargreaves Lansdown had included the Woodford Equity Income fund on its ‘best buy’ list for some time, the suspension of that fund in June damaged confidence in the firm’s judgment — and hit its share price.

Share price

After an early battering, its shares were recovering, but the subsequent news that Woodford’s fund suspension is now going to last at least until December has knocked them back again.

Usually when an investment goes bad we have the option of getting back whatever money we can and moving on, but Investors in the Woodford Equity Income fund can’t even do that right now. They have to sit tight and wait for Woodford to rebalance the fund’s holdings and provide sufficient liquidity to satisfy those who want their money out.

But you know, I can’t help wondering if it might make sense for Woodford to switch the bulk of his fund’s investments to cash, at least in the short term, because I suspect there’ll be a very large number of investors sitting anxiously at their computers on the day the funds reopens, with their fingers hovering over the ‘Give me what’s left of my money back’ button.

Outlook

My fear for Woodford is that his reputation could be damaged beyond repair, but how do things look for Hargreaves Lansdown? I think the damage will be transitory, and just as the share price had quickly started to pick itself up from its immediate June fall, so will it do the same from the latest bad news — and again from whatever fallout it might suffer once we see the final Woodford picture.

One investor who’s seen this as a buying opportunity is Nick Train, he of Lindsell Train Invstment Trust fame, who has been investing more cash in the company. And he’s a man many people are starting to think of as the UK’s Warren Buffett, so he must be worth listening to… oh, hang on.

But for me, I’ve never understood the super high valuation of Hargreaves Lansdown shares. Even now, after the latest weakness, we’re looking at a forecast P/E of 37. Just before the Woodford disaster hit town, that figure was a barely believable 47.

Valuation

I’m sure there’s a decent outlook for long-term earnings growth for Hargreaves Lansdown, but over the long term, I just have this feeling that we must see some sort of reversion to the norm — to a rebased valuation that’s in line with the way other companies with similar earnings are valued.

Admittedly, I’m sure it could be a few years yet, but I just can’t bring myself to buy high-flying growth stocks on valuations that I think are simply too rich.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.