Neil Woodford, founder and fund manager at Woodford Investment Management. Picture: JONATHAN ATKINS/REUTERS
Neil Woodford, founder and fund manager at Woodford Investment Management. Picture: JONATHAN ATKINS/REUTERS

London — The suspension of Neil Woodford’s flagship fund has put the focus on a little-known firm tasked with ensuring his investors were being looked after properly.

While Woodford, one of Britain’s highest profile money managers, picked the companies in which the LF Woodford Equity Income Fund invested, the fund’s governance was overseen by a company with a much lower profile — Link Fund Solutions.

Link acts as Woodford’s authorised corporate director and is the fund’s legal owner. In the prospectus for the suspended fund, Link lists a group of six directors led by CEO Christopher Addenbrooke.

Authorised corporate directors are meant to ensure fund managers stick to their investment mandates and follow the rules. They usually attract little scrutiny, but Woodford’s fall from grace has raised questions about whether they are fit for purpose.

One key question is whether authorised corporate directors — hired by the investment manager — challenge fund managers’ decisions robustly enough.

“The authorised corporate director’s role is very much behind the scenes from most retail investors’ perspective, but is nonetheless crucial — they play a major part in ensuring that the fund complies with the Financial Conduct Authority’s rules,” said Richard Small, a financial services partner at Addleshaw Goddard.

Britain’s regulator, the Financial Conduct Authority, has said it is looking into the circumstances surrounding Woodford’s fund suspension and the listing of some of its assets on an exchange in offshore dependency Guernsey, a move Link would have needed to approve.

“I would expect that the Financial Conduct Authority will take a hard look at Link’s role in this affair,” Small said. “They will be asking themselves whether this is another case of firms taking an overly technical tick-box approach to regulation without proper regard for the spirit and intention of the rules.”

Liquidity question

Link, which works with almost 7,000 clients, suspended the £3.7bn fund two weeks ago as it struggled to meet redemption requests, in part because of its large holdings in private companies.

Under particular scrutiny are stakes in four firms listed on the International Stock Exchange in Guernsey, which helped Woodford meet rules capping the proportion of unlisted holdings in his portfolio at 10%.

The listing of BenevolentAI, Ombu, Industrial Heat and Sabina Estates helped the fund to comply with the cap. However, none of those shares have traded, the International Stock Exchange website shows.

“The decision to reduce exposure to unquoted assets while indirectly maintaining exposure through a listed vehicle was in line with the investment objectives and strategy of the fund,” a Link spokesperson said.

But Financial Conduct Authority chief Andrew Bailey said while the Guernsey listings were permissible under the rules, “I don’t think it is right”, suggesting it may focus on breaches of the spirit of the law.

The Financial Conduct Authority said on June 5 it has been in discussion with Link and the International Stock Exchange regarding the Guernsey listings.

The authorised corporate director must follow the Financial Conduct Authority’s collective investment schemes rules for investment funds. Under them, Link had the power to designate Guernsey as being a suitable market, but only as long as it met conditions including that it was “adequately liquid”.

The watchdog is expected to scrutinise why Link deemed Guernsey a suitable venue to ensure that assets could find a ready buyer if Woodford needed cash to meet redemption requests.

Alan Hughes, partner at law firm Foot Anstey, said: “Something may be strictly within the rules but is it in the best interests of the investors? The fund itself and the authorised corporate director may have a broader duty to consider.”

The Woodford suspension has prompted calls for a reform of the industry.

“The model is broken because of the conflict of interest,” said Matthew Priestley, head of investment management oversight at Fund Partners, itself an authorised corporate director.

A better way, he said, would be for the Financial Conduct Authority to ringfence some of the fees it gets from the industry to pay for authorised corporate directors out of a “blind pot”.

The Woodford suspension is the third time in recent years that Link, and its former incarnation as Capita Financial Managers, part of outsourcer Capita, has drawn regulatory attention.

In 2012, Capita Financial Managers was censured for breaches of principles related to diligence, management and control in the collapse of two Arch Cru funds. It paid £32m towards a £54m compensation scheme for investors, without admission of liability.

The Arch Cru funds were invested in Guernsey cell companies that listed on the Channel Islands Stock Exchange. The cell companies invested in a range of unlisted assets, including hedge funds and fine wine.

One criticism of Capita Financial Managers was that it did not adequately monitor liquidity. About 6,400 investors lost nearly £400m after the funds were wound up in 2010.

Capita Financial Managers was censured again in 2017 for a lack of due diligence on the Connaught Income Fund, which liquidated in 2012. Investor losses were about £110m, although Capita paid up to £66m in compensation.