Woodford and the KIDs
The curious case of homogenous risk reporting.
The financial press have been following the recent woes of Neil Woodford and his distributors, particularly the mega-platform Hargreaves Landsdown and the somewhat costly advisor network St James Place. It seems with hindsight (and to be fair many flags on the way) that risk management was lacking. That style drift, a charismatic manager and conflicts of interest meant that small investors who were buying or were advised to buy a relatively low risk equity fund, have bought what now seems to be illiquid VC investments managed by a team with somewhat limited micro-cap experience.
This should not happen in transparent well-regulated markets. Indeed the FCA and its European equivalents have been attempting to standardise risk reporting and cost analysis in recent years so that small investors can make informed decisions even if they have limited experience (the same being true for advisors!). This legislation commonly referred to as PRIIPs (Packaged Retail and Insurance-based Investment Products) requires funds to provide a ‘Key Investor Document’ - required by law to help consumers understand the nature and the risks of using investment funds. They are also required to review and update the document if the risks of the asset changes.
The creation of these standards is an evolving process which overtime will increase transparency in the markets and aid understanding of how the economy and capital allocation work. Which is why we (RiskSave and those who believe the capital markets can and should have a social purpose.) support the legislation and are helping improve them. Currently many packaged products do not produce KIDs or update them in a timely matter despite an FCA requirement to do so. The FCA principles require businesses to treat their customers fairly and to pay due regard to the information needs of their customer, principles which are relevant to fund manager’s duty to keep their key investor documents current and accurate.
The FCAs Seventh Principle for Business states:
‘A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading’
A link to the Key Investor Document is here (as of 14 Jun 2019)
Recent events may mean that the risks contained in the funds are not what they were, when the board of directors and managers must consider the risks of a firesale, which may change the investment objectives. Ignoring the fact the sum of the various costs associated with running the fund don’t equal the total costs presented , a quick check using RiskSave’s template and the PRIIPS methodology suggests that the reported risk rating is too low and that a rating of five out seven is now warranted (even this may not be an accurate reflection of the risks involved, but the required methodology is backwards-looking, an issue which the regulators are aware of). It is interesting to note that despite the importance European regulators have put on transparency and the KIDs that the need for these to be considered has yet to enter the debate. Also of course that the compliance teams at the manufacturer and distributors have not asked for more accurate and up to date information in a timely manner.
If you have invested in funds similar to this, would you expect more timely risk reporting? I think that I would. Your IFA or fund platform should be communicating changes in your portfolio, this is not only their obligation as a regulated entity, but also as a professional courtesy.
Disclosure: I do not hold nor do I intend to hold any funds managed by Woodford Investment Management.
Post Script: On request - we’ve added our guide to the Key Investor Document here