The Week: Woodford’s legacy for active management

The demise of Woodford Investment Management is a blow for the whole active industry.


  • The end result of the Woodford saga is likely to be more regulation.
  • It has become increasingly clear that daily-dealing open-ended funds are not appropriate for all assets.
  • Regulation on liquidity and dealing is unlikely to address all the problems raised by Woodford’s failure.

It’s all over. Sadly, Neil Woodford’s legacy will no longer be as one of the finest investors of his generation; instead he’ll be remembered for presiding over a miserable failure that left investors poorer and put a dent in the reputation of the active management industry. 

The blame game has started: Woodford himself has blamed an irrational market, jumpy investors, a messy Brexit and the unseemly haste of Link Asset Services for the closure. He has stopped short of suggesting he may have just got it wrong, though that is the conclusion of many others. His supporters continue to blame a vitriolic media who, having created an icon, cheerfully smashed it to pieces. 

The end result of this sorry show is likely to be more regulation. Throughout this process, it has become increasingly clear that daily-dealing open-ended funds are not appropriate for all assets. What is less clear is why investors need daily dealing. As long as long-term investors know when they can deal and when they can’t, does it matter?

Ian Sayers, chief executive of the AIC, has talked about building new rules on ‘reliable redemption’. He says: “Retail investors should not buy into a fund offering daily redemption on one set of conditions, only to find that, further down the line, these conditions change or, worse still, that they cannot get out at all.”

In his view, ‘reliable redemption’ would have to observe two key principles: the basis on which an investor could leave the fund would not change, irrespective of the level of redemptions. Suspensions would only occur if the fund faced unforeseeable difficulties. To ensure this, the redemption terms would be fixed at the outset with reference to how long it would take to unwind the portfolio. 

Funds with liquid portfolios could still offer daily redemption of an investor’s entire holding, but where this was unrealistic, firms wouldn’t need to do so. This would help areas such as property, smaller companies or emerging markets, but also prevent managers having to hold large cash holdings to meet potential redemptions, thereby compromising their investment style. 

This would go some way to addressing the problem. However, many of the uncomfortable elements of the Woodford saga are unlikely to be addressed by regulation on liquidity and dealing. There has never been an adequate explanation as to why the firm continued to charge unitholders management fees when the funds were closed. The excuse that the business had to keep running hardly held water when the two owners had deprived it of working capital by taking vast dividends. A similar problem led to New Star’s downfall. It is difficult to see how regulators can address this problem. 

Humility has been sorely lacking during this whole episode. The investment industry, which already suffers from poor public perception, has been dealt a real blow.