John Wylde has unusually broad-based insurance and risk-management experience in both the insurance and legal professions. His professional experience includes positions with Castle Underwriting Agents at Lloyd’s; Davies Arnold Cooper; the Financial Services Authority; HSBC Insurance Brokers; and Marsh Ltd.
Woodford Investment Management Ltd and the Insurance Consequences
In the wake of the problems affecting Woodford Investment Management, this article discusses the various categories of businesses which are likely to consider the relevance and effectiveness of their current insurance programmes and how such insurances might respond.
Although the history of the short-lived Woodford Investment Management is well known, it may be useful to provide a brief summary and chronology. The saga is a dramatic one and, perhaps uncharitably, a striking example of hubris and nemesis. As an aside, it resembles in some ways the rapid decline and fall of feted individuals in another sphere of activity and a different era, namely the cult of “star underwriters” in the Lloyd’s Market from the dizzy heights of the 1980s to the catastrophes of the 1990s.
Neil Woodford resigned from Invesco in 2014 with a stellar reputation. As an investment manager he built his profile as a stockpicker of reliable income-focused companies which tended to be large cap and were invariably listed on major Stock Exchanges.
This reputation had been enhanced not just from the excellent results of the Invesco income funds he had managed for nearly 20 years but also from his contrarian decision-making, which included avoiding the massive losses incurred by most of his peers in the dot.com bubble in the early 2000s and the 2008-09 Global Financial Crisis.
The Invesco funds he headed were retail ones and so when he founded Woodford Investment Management in 2014 he received unprecedented support from his historical followers, chief of which was Hargreaves Lansdown.
His new fund, LF Woodford Equity Income, was an open-ended one registered as an OEIC and grew to a massive £10 billion plus in 2017. However, it did not produce the significant returns predicted. There were two main reasons:
- Firstly, Woodford lost his stock-picking touch. Three examples from several illustrate this; the valuations of significant holdings in Capita, Provident Finance and Stobart bombed, for well-publicised reasons.
- Secondly, Woodford expanded the portfolio from 2016 onwards to include an increasing number of unlisted companies, many of which were involved in life sciences research and bio technology such as immunology. These companies’ securities are inevitably illiquid and they were plainly speculative investments.
This strategy led to massive withdrawals from the fund and its subsequent suspension, which still endures. The other Woodford funds launched in 2016, LF Woodford Income Focus (another OEIC) and the Woodford Patient Capital Trust Plc, featured many cross shareholdings and fared no better. The former is also suspended and Schroders have recently replaced Woodford as investment/portfolio manager for the latter.
Woodford Investment Management’s problems mean that a number of businesses and individuals may be “in the firing line”.
The first target has to be Woodford Investment Management Ltd, which would be expected to have broad form Civil Liability and D&O covers.
The Civil Liability cover should, subject to conditions, respond to claims from wealth management firms, IFAs and stockbrokers acting on advisory or discretionary mandates on behalf of clients for alleged loss incurred through breach of duty, contract, misrepresentations etc. - in summary, allegations that Woodford had breached his investment mandates in respect of the Woodford funds. Such claims are likely to involve allegations that information concerning the Woodford funds published by the Company was misleading, with a particular focus on the relevant Key Investor Information documents for the two funds and the Key Information Document for the Patient Capital Trust. It should be noted that these documents are required to be relatively detailed, particularly in respect of Objectives and Investment Policy and Risk and Reward Profile.
Turning to the issue of D&O cover, both the Directors of the Company and the Directors of the Investment Trust will be subject to review by the FCA under the Senior Managers Regime. D&O cover will normally include cover for defence and representation costs for both areas under what is usually called the Regulatory Investigations Insuring Clause or Extension. Representation costs should extend to situations where a director or former director is requested to assist the FCA in its evidence-gathering and for summonses to appear as a formal witness.
D&O cover should also respond to claims in any relevant civil proceedings where a director is joined as a Defendant or where he or she has received a credible threat of such a claim.
The second potential target has to be investment advisers. Hargreaves Lansdown in particular has received extensive media coverage because the firm continued to support the Woodford funds quite late in the day after various warnings had been widely sounded publicly. This support extended to the inclusion of the main Equity Income fund in the Hargreaves Lansdown official top 100 funds for 2018 publication. Investment advisers would be expected to have Civil Liability and D&O programs of the kinds already described and which would respond in a similar manner.
A third potential target is the Authorised Corporate Director for the Woodford Funds, Link Fund Solutions, whose role is a regulatory one. Link has been the object of media criticism for reacting too slowly to valuation uncertainties in respect of various unlisted holdings. Any potential claims should also fall under broad form Civil Liability cover and also D&O cover of the kinds already described.
While most of the media coverage of the problems affecting Woodford Investment Management has focused on losses suffered by investors, the ramifications may also have significant costs for the insurance industry and can be expected to play out over a number of years.
