Odious institution has major effect on one of the world’s largest retail FX firms. Why does everyone believe them?

One of the most interesting and perhaps perplexing unwritten examples of mild hypocrisy in the global financial services industry is the continual bating of bona fide, regulated FX firms to the point of having concentrated huge efforts on concerns about trade execution and leverage, as well as marketing efforts to retail clients and huge, all encompassing new infrastructural requirements.

Whilst good quality regulation and the adherence to it is essential for electronic trading businesses in order to ensure the longevity and sustainability of the retail trading sector, there has always been an unwritten assumption among regulators and critics that somehow, hedge funds and investment management companies – themselves very much engaged with retail electronic financial services business – are above such suspicious treatment and that they should all be held to a higher standard.

FinanceFeeds is an absolute advocate of the need for FX firms to move into the professional trading and hedge fund sector, largely because many good quality FX brokerages along with their associated prime of prime liquidity providers and technology vendors that integrate platforms into a multi-asset market are more than capable of providing a highly efficient direct market access solution for wealth managers with a diversified asset requirement at low cost with efficient execution.

This industry is, after all, a massively entrepreneurial and innovative sector, far more than the traditional hedge funds are.

One particular investment manager which has often been held up by the press, regulators and industry executives alike is Woodford Asset Management, a vast firm with aspirations of challenging banks and electronic trading giants.

Over recent years, Woodford Asset Management has been championed by so many commentators that it must be impossible to count how many laurel leaves are now under the firm’s reputation.

This week’s revelations demonstrate that it is far from prudent to assume superiority based on name and classification.

The company has been in the spotlight for continuing to recommend Woodford’s equity income fund until he blocked withdrawals on 3 June. The suspension of the fund affected more than 290,000 Hargreaves customers, about a quarter of the company’s investors, with savings likely to be trapped for six months.

Imagine the furore should a retail FX broker do that!

By contrast to the pillorying that would ensue an FX broker if it blocked withdrawals of client capital, Woodford Asset Management’s founder, Neil Woodford CBE, knighted for ‘services to the economy’, has managed to remain relatively unharmed by the direction his company has taken.

In March 2019, after two years of poor performance during which fund assets contracted by more than £5 billion, the Sunday Times carried out an investigation into the

It found the fund held less than 20% of assets in FTSE 100 companies compared to over 50% when it was created, and over 20% of assets were in small Alternative Investment Market companies.

On 4 June 2019 trading in Woodford Investment Management’s largest fund (the Woodford Equity Income fund) was suspended. There had been large withdrawals of funds by many investors. Following this, St. James’s Place plc terminated Woodford’s contract to manage three of its funds, valued at £3.5 billion.

The FCA has launched a formal investigation into the suspension a Woodford spokesperson said: “We can confirm we have been contacted by the FCA, regarding its investigation relating to the events that led to the suspension … and will be co-operating fully with its investigation.”

Suspension in this case is a box-ticking exercise. The old boy network well and truly at work.

Why the diatribe, you may ask?

Well, this affects our industry directly, yet Woodford Asset Management continues to be viewed as a professional hedge fund and therefore part of the elite compared to the retail FX industry, which is a totally inaccurate assumption.

Hargreaves Lansdown, the largest retail financial services firm in the UK, which is led by CEO Chris Hill, former CFO of IG Group (Hargreaves Lansdown’s HL Markets FX brand is a white label of IG Group) has been massively affected by Woodford’s issues.

This demonstrates a form of total trust that no firm would give an FX broker. We all know what some of the profit sharing antics of so-called liquidity providers have led to, yet Woodford Investment Management holds its head high after decimating Hargreaves Lansdown’s share prices.

Hargreaves Lansdown will soon report results after a disastrous week for Woodford, who had been held out as a star fund manager and favourite of retail investors. The equity income fund’s administrator said it would probably take until early December for the fund to reopen as Woodford disposes of difficult-to-sell stakes.

Woodford was also revealed to have sold more than half his shares in a separate publicly traded fund whose board is considering terminating his position as the asset manager.

Chris Hill, Hargreaves’s CEO, issued an apology to his customers a few days after the fund’s suspension. “We all share their disappointment and frustration,” he said. Hill has also offered to forgo a bonus of as much as £2.1m until the matter is resolved and has waived Hargreaves’s fees for Woodford investors.

Hargreaves’s results will be the first time the company has commented about the impact of the Woodford affair on its business and reputation. Hill has answered written questions from the Treasury committee but these concentrated on his company’s dealings with Woodford and how it decides which funds to recommend.

For the year to the end of June, analysts expect pre-tax profit to rise almost 5% to £306.8m on revenue up 8% to £484m. Those figures cover less than a month of the fallout from the Woodford situation.

Gurjit Kambo, an analyst at JP Morgan Cazenove, said in a note to clients that customer deposits of funds into Hargreaves were likely to be affected by the Woodford debacle.

“With investors in Woodford’s equity income fund still gated, and the relationship between Woodford funds and Hargreaves Lansdown under increased scrutiny, we have reduced our inflow estimates,” Kambo said. He cut his estimates for new funds for 2020 to £5bn from £7.9bn and to £5.5bn from £9bn the year after.

This is effectively white noise. FX firms in Australia, the US and Britain have been wound up by regulators, their responsible officers criminally prosecuted and assets seized time and time again for practices far less grim than this. Yes, they should pay the price, but everyone should pay the price, not just retail FX brokers.

Hargreaves Lansdown, whose Vantage system allows retail investors and traders to manage their accounts from endowments and ISAs to FX and CFD trading in one place, has been getting more into the FX and CFD space and expanding its range, having recently launched a product which is aimed squarely at the self-directed retail investor.

This is offered via Hargreaves Lansdown’s IG Group white label HL Markets, wrapped into Hargreaves’ highly sophisticated proprietary infrastructure.

The company, which has £85.9 billion assets under administration all from direct retail customers, has unveiled a global equity fund, to sit alongside its existing UK growth and UK income funds under the ‘HL Select’ banner.

The HL Select Global Growth Shares scours the world’s major stock markets for the best investment opportunities for the long term and will be managed by the same team as the other ‘HL Select’ funds, led by Steve Clayton, the company’s head of equity research.

The portfolio, which launches on 3 May at £1 fixed launch price, primarily targets capital growth over the longer term. However, the investment team expects the fund to pay a dividend – although no income goals have been set. It will typically consist of 30 to 40 names, sit in the Investment Association’s Global sector and be benchmarked against the FTSE All-World index – but will not consider the make-up of the index when it comes to portfolio construction.

So why did a company this astute trust Woodford Asset Management? It would not have trusted AFX Group or ILQ, both of which had engaged in profit sharing and mixing client funds with operational capital, but to a far lesser extent, however the end result is exactly the same.

Look at the NFA’s treatment of Drew Niv, founder and former CEO of FXCM, which at one time was the world’s largest FX firm. He personally prevented any damage to client withdrawals during the Swiss National Bank’s removal of the EURCHF peg which plunged FXCM’s resources into massive decline (as it did with many other firms) yet the regulators would not let him go. FXCM has been absolutely decimated, whilst Woodford carries on. Of course, FXCM’s alleged false statements that it was A-booking trades when it was sharing them with a market maker is not excusable, but customers were not affected, and nobody complained. Therefore the Woodford situation is worse.

Woodford’s reach has even been notable in the firm’s aspirations toward challenging the banks. Neil Woodford’s venture capital fund enabled Atom bank, the UK’s first bank built exclusively for mobile, to raise £50 million in a fundraising round with participation from BBVA, Toscafund, Woodford Patient Capital Trust and funds advised by Perscitus LLP.

The funds raised were set to used to finance further growth and to continue the bank’s investment in technology.

Atom continues to be a fast-growing challenger in the UK’s lending markets. The bank says its total lending, for homeowners and small businesses, has grown by 76% in the past year to £2.4 billion. At present, Atom is welcoming up to £20 million of business and £10 million of residential mortgage applications each week.

In the meantime, Atom is making progress with re-platforming the bank into the cloud and preparing to launch new products using Thought Machine’s smart contract core banking technology. In November 2018, Atom bank agreed a multi-year partnership with Thought Machine to put its next generation of personal and business banking products onto Thought Machine’s Vault platform.

Thus, if the investment division of Woodford is blocking withdrawals, how can any client of Atom bank be certain that the backing behind it is stable? As mentioned yesterday, challenger banks are currently in major vogue, perhaps because their initial seed capital amounts have not yet run out!

We will only see which have merit in 10 years time when they are running on their own revenues. Let’s see if they can challenge long established institutions.

Woodford Patient Capital is now the target of an aggressive potential takeover by Mastertrust, purely because of its instability.

It depends who you play golf with as to whether all retail FX and CFD firms should be under massive scrutiny and hedge funds should be allowed to create havoc with minimal consequences.

It is time for the FX industry to challenge the traditional hedge funds. We know it can be done. FinanceFeeds Thought Leadership Conference in May this year was testimony to that.

Image: Clifton Suspension Bridge in Bristol, Hargreaves Lansdown’s home town