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Are Link Group shares set for another fall on Neil Woodford fund blow-up?

Link Administration Holdings Ltd (ASX: LNK) shares are down around 32% since May 31 when the fund administration and asset services group handed investors a big profit downgrade after warning a weak six months to June 20 2019 means operating NPATA is now expected to be between $195 million to $205 million, compared to $206.7 million in the prior year.

Link blamed the weaker performance on Brexit uncertainty affecting its asset services division in the UK, with lower capital-market-facing and share dealing revenues due to a lack of activity in the UK economy. 

It also blamed regulatory change in the superannuation sector in Australia for rising costs that it expects will continue into FY 2020, while on June 18 it provided another operating update flagging what may prove a massive problem for its Link Fund Solutions Limited (LFS) business in the UK.

This business is the Authorised Corporate Director (ACD) (roughly equivalent to trustee) of the LF Woodford Equity Income Fund in the UK that is now the subject of a growing scandal.

By way of background it’s the legal responsibility of a fund’s ACD to monitor investment guidelines in order to ensure the fund manager (Neil Woodford in this case) acts in the best interests of investors and follows investment guidelines (contained in a prospectus or IMA) or risk management rules (normally under UCITS) that are designed to protect retail investors from excess losses, risks, or the like.

An ACD as the legal owner of the fund and investors’ assets it will also appoint fund accountants, unit pricers, etc, which is where Link comes in handy as it also provides many of these services itself in legally separate functions to the ACD’s.

The rub is that an ACD is in reality appointed and paid for by the fund manager, so making sure they act independently and potentially challenge a fund manager on his investment allocations has long been an area of focus for regulators including the UK’s Financial Conduct Authority (FCA) and ASIC. 

Unfortunately for LFS it’s being alleged that Mr. Woodford rode roughshod over the fund’s legal investment limits in taking excess risks by buying illiquid securities in overseas exchanges such as Guernsey, all the while without LFS intervening on behalf of investors as it was legally obliged to do.

As background Neil Woodford is perhaps Britain’s most famous fund manager who for around 20 years ran outperforming large-cap funds at Invesco Perpetual and gained a strong reputation for doing so.

As a result Britain’s clickbait and headline chasing financial press quickly christened him ‘Britain’s Warren Buffett’ even though he was nothing of the sort, with much of his outperformance due to big bets on morally dubious tobacco stocks. 

However, his reputation proceeded him due to the internet traffic chasing journos with financial advisers (pushing retail clients into his underperforming funds) and potentially even ACDs also in awe of him, despite his increasingly diabolical performance and investment bets. 

As investors rushed for the exits on the LF Woodford Equity Income Fund LFS under instruction from the manager was forced to suspend it as it could not meet all the redemption requests.

It turned out that one of the problems (among others) in meeting the redemptions was too many illiquid and even unlisted assets, which makes little sense for a blue-chip equity income fund. 

It is now being alleged the manager got round rules capping unlisted holdings at no more than 10% of the fund through some sleight of hand investments on the Guernsey stock exchange that LFS permitted. 

I expect if these allegations are proven the FCA will come down like a tonne of bricks on Link Fund Solutions Limited and its directors.

For its part Link maintained in its June 18 announcement that it still considers LFS “has acted at all times in accordance with applicable rules and in the best interests of investors” over the Woodford Fund affair. 

LFS is also only a small part of Link’s business, but the regulatory risk alone is enough to put me off buying Link shares today. 

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Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Link Administration Holdings Ltd. The Motley Fool Australia has recommended Link Administration Holdings Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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