One of the most troubling aspects of the Woodford fund management imbroglio is the lack of Chinese walls in his shrinking empire.
As a quoted firm, Woodford Patient Capital Trust, in common with other investment trusts, is able to use leverage to bolster returns. So, intrinsically, there is nothing wrong with Patient Capital borrowing £150m from Chicago-based Northern Trust to support forays into the market.
But it is not that simple. On launch, Patient Capital investors were assured there would be no long-term borrowing and a limit of 60 per cent on holdings of unquoted stocks. That changed.
The original Northern Trust loan doubled from £75m to £150m and is developing into a multi-year facility. In addition the limit on unquoted stocks was lifted from 60 per cent to a more racy 80 per cent.
Crumbling: One of the most troubling aspects of the Neil Woodford fund management imbroglio is the lack of Chinese walls in his shrinking empire
That became increasingly relevant when flagship Woodford Equity Income fund dumped holdings into Patient Capital as it has fought to restore liquidity levels.
The crossover between the two funds is far too close for comfort. Patient Capital owns 35 companies in Equity Income, accounting for more than 77 per cent of the portfolio. Thus as Equity Income has dumped holdings, as is seeks to reopen for business, Patient Capital has taken a big hit.
That is why the shares trading at just 55p, after another tumble, are now selling at a 30 per cent discount to asset value.
The two funds essentially are a mirror image of each other. Meanwhile, three of Patient Capital’s directors sit on boards of companies in which the trust is invested.
Shareholders brave enough to hold Patient Capital might question why chairman Susan Searle and her board, having indicated they are looking to appoint a new manager, haven’t yet acted in the best interest of investors by doing so.
Woodford has pushed investment trust rules to the limit. The average borrowing in the sector is 9 per cent and at Patient Capital the £150m of loans are pushing the acceptable limits of 20 per cent.
As big a question is Northern Trust’s role. It is one of a number of financial institutions, such as Law Debenture in the UK, that offers depository/custodian services designed to give assurance to savers that the underlying assets are in safe hands if something changes.
It turns out that Northern Trust is not just depository for some Woodford funds but also a lender, raising potential conflicts of interest.
We shouldn’t be surprised by this disclosure. What we have learned since Equity Income was gated is that its relationships with investment platform Hargreaves Lansdown are far too cosy.
Its quoted sibling Patient Capital is run like a client of Equity Income and the Guernsey stock exchange is a friendly place to turn unlisted into quotes companies.
It would be nice to think that lessons from all of this are being heeded across the sector. Owners and boards should be double-checking to make sure that interlocking relationships, that compromise independence, are unwound.
Bank of England governor Mark Carney is taking no prisoners when it comes to open-ended funds like Woodford Equity Income.
He makes no subtle distinctions between rules-based regulation against principles as outlined by Financial Conduct Authority boss Andrew Bailey.
Using very ungovernor-like language Carney told the Commons Treasury Committee that such funds ‘are built on a lie’.
Investors, such as Kent County Council, may think that they have daily liquidity but most of the assets they hold cannot be instantly turned to cash.
Carney argues the situation is not very different to the banks during the financial crisis when first Northern Rock and then bigger beasts HBOS and Royal Bank of Scotland ran out of money.
The sale of BCA, proprietor of British Car Auctions and We Buy Any Car, to private equity outfit TDR is going smoothly with several big investors, including Neil Woodford, accepting the £1.9 billion offer.
But as the legendary New York Yankees baseball manager Yogi Berra observed, the game ‘ain’t over, ’til it’s over’. Non-Standard Finance found this out to its cost in its failed bid for Provident Financial.
The real story at BCA is that private equity looked to be an easier route to take for the finance support it needed to invest in better digital systems.
But there is time for the City to show it is capable of directly supporting a publicly quoted enterprise and technology.