It was during a 26-year stint at Invesco Perpetual that Neil Woodford earned his reputation as a tough, straight-talking fund manager.
A £1,000 investment in his Invesco Perpetual High Income Fund back in 1988 would have been worth £25,349 by the time Mr Woodford handed over control to his successor, Mark Barnett, in March, but it was his willingness to wade into high-profile corporate battles that really set him apart from most of his contemporaries.
The activist, who quit Invesco to launch Woodford Investment Management, has been instrumental in a number of boardroom overhauls and also played a leading role in a shareholder revolt against the failed merger between BAE Systems and EADS.
When he speaks, the City takes notice, so yesterday‘s disclosure that he had sold his stake in HSBC because of “fine inflation” was always going to make a splash.
Mr Woodford warned that investigations into the manipulation of market benchmark rates and foreign-exchange markets could land HSBC with “significant financial penalties” and prevent it from growing its dividend.
In a blog post, he said: “I started to build a position in HSBC for some portfolios in May last year and I included it in the portfolio of the Woodford Equity Income Fund at launch [in June]. In recent weeks, however, I have started to become more concerned about one particular risk: that of ‘fine inflation’ in the banking industry.
“Banks have attracted many fines in the post-financial crisis world as regulators and policymakers have cracked down on past and ongoing wrongdoings in the industry. The size of the fines, however, appears to be increasing.”
About 2.68 per cent of Woodford’s Equity Income Fund was invested with HSBC, amounting to about 10 million shares, a sub-1 per cent stake in the lender, worth just £65m.
However, his warning is still likely to reverberate across the sector with a number of bumper fines handed out since the financial crisis.
Last month, Bank of America (BoA) agreed to pay a record $16.7bn (£10.1bn) fine for misleading investors about the quality of loans it sold, while HSBC itself paid a $1.9bn penalty for failing to prevent Mexican drug cartels laundering money through its bank accounts in 2012. Other high-profile cases include BNP Paribas’s recent $9bn settlement with US prosecutors for breaking sanctions against Cuba, Iran and Sudan.
Mr Woodford continued: “HSBC is a conservatively managed, well-capitalised business with a good spread of international assets. As chief executive, Stuart Gulliver has done a great job over the last four years, making a very complicated organisation much simpler to understand. It is still a huge and complex business, however. Its 2013 Annual Report & Accounts document runs to around 600 pages, many of which are dedicated to the risks that it faces.”
But is Mr Woodford right? Should investors be afraid of “fine inflation”?
In a recent study, Roger McCormick, a former law professor at the London School of Economics, found that the 10 worst-hit banks, including BoA, Lloyds, RBS and HSBC, had paid about £160bn in fines from 2008-13 for misconduct of various kinds, including mis-selling payment-protection insurance (PPI), manipulating rates and failing to observe anti-money-laundering rules.
He said: “The numbers speak for themselves, but I don’t think the banks are out of the woods yet.
“In 2014, we’ve seen some pretty horrific fines being levied on the banks and it’s fair to say that there’s still quite a bit in the pipeline with issues like foreign-exchange markets still be resolved. The picture is complicated because the conduct costs relate to different things in different countries. PPI, for example, is a phenomenon pretty much confined to the UK, it seems, whereas in the US there have been mis-selling problems with other financial products.”
Not everyone is as downbeat as Mr Woodford on the sector’s prospects and yesterday another leading fund manager, Richard Buxton, the head of equities at Old Mutual Global Investors, told The Independent he doesn’t plan to sell his stake in HSBC.
“HSBC remains my biggest position and I’m also a holder of Barclays and Lloyds,” he said. “Of course, it is highly likely that banks will be subject to further fines for historic behaviour, but it is highly unlikely that in the case of these banks it would require raising of additional capital.
“It will defer a return to better levels of profitability and dividend payment, but does not take away from the underlying case for investing in them, for the patient, long-term investor”.
HSBC shares fell 4.5p to 647.5p yesterday as Mr Woodford said he would focus on other financial investments like insurer Legal & General.
Although only time will tell whether he was right to cash in his HSBC stake, there’s little doubt that “fine inflation” is a serious concern for the banking industry.