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1 November 2019

David Prosser highlights the benefit of investment companies when it comes to protecting shareholder interests.

Investors in Woodford Patient Capital have enjoyed some much-needed good news in recent days, with the investment company’s share price bouncing almost 30 per cent on news that Schroders is to take over its management. But while this boost will be welcomed, the bigger picture here is what it tells us about fund vehicles and long-termism. In short, this saga makes a compelling case for the investment company structure, which has worked exactly as it should, in the interests of investors.

There’s an important point often missed in discussions about Woodford Patient Capital. While the fund’s launch four years ago was the brainchild of star fund manager Neil Woodford, and has been managed ever since by his Woodford Investment Management, it is an independent company that isn’t beholden to any individual or asset management company. By contrast, Woodford Equity Income, the open-ended fund where Mr Woodford’s problems started, is a product sold by its manager – it’s not a free-standing entity in its own right.

The distinction is vital. Woodford Equity Income is now closing down and will become a footnote of history, along with Woodford Investment Management, which is also shutting up shop. The fate of the product and the asset manager proved to be more or less inseparable. By contrast, Woodford Patient Capital will continue under its new management (and with a new name, Schroder UK Public Private Trust).

This is not to suggest everything is rosy for the investment company. The share price increase of recent days may not be sustained, with Schroders now facing some difficult decisions about the extent to which the fund’s portfolio needs to be restructured – and how to do that. There will be hiccups and costs along the way, and while Schroders says it is confident about the fund’s medium- to long-term prospects, there are no guarantees.

Nevertheless, the fund has a future. Its board of directors have managed a difficult situation on behalf of shareholders, who are now emerging from the other side of this protracted affair. Even before Woodford Investment Management announced its closure, necessitating the appointment of a new manager, the board had debated whether to fire the firm – it might have done so in any case.

Now, it’s certainly true that the investment community continues to argue about whether the board made the right decisions at each stage of this saga, or whether it moved quickly enough when problems began to emerge. The directors themselves felt compelled, earlier this year, to make new board appointments to underline their independence of Mr Woodford’s firm.

However, that debate should not detract from the underlying story here. Shareholders in a closed-ended fund that trades as a stock exchange-listed company in its own right were always going to enjoy more protections than their peers in the open-ended fund equivalent.

It’s a lesson to learn for the future. The Woodford story has been one of extremes, but it is in such circumstance that ideas which previously seemed theoretical or hypothetical are tested. Not too many people emerge from this scandal with their reputations enhanced, but those who believe in the investment company structure can hold their heads high.

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