Online fund supermarket and broker Hargreaves Lansdown (LSE: HL) has been a market sweetheart, with a price increase of more than 10 times since its IPO in 2007. The companys activity, which consists in directing investors money to the best-buy funds, has mainly benefited from the pension reform and the growth of SIPPs to gain a 40% share of the UK self-directed investment market.
The development of online brokers has made investment in asset-managed funds and ETFs more widespread. The freedom to invest in alternative pension funds was a major innovation at the time, and allowed Hargreaves Lansdown to attract 1.1m people to invest through its platform.
Loss of investor confidence
Until recently, Neil Woodfords Patient Capital Trust was one of Hargreaves Lansdowns favourite funds, regularly ranking at the top of the companys Wealth 50 list. This list contains the most recommended active and passive funds, and WPCT was still in a good position last January.
Hargreaves customers accounted for about 20% of all the money invested in Patient Capital. Despite the disappointing performance of Mr Woodfords fund, Hargreaves supported him until the end. This is a loss of credibility from my point of view, and trust is central to this business.
Investor confidence (and a lot of money) has been lost in this case. Hargreaves customers, who hold 2.1 billion invested in WPCT, have lost about a third of their investment in the last month alone. I do not think that Hargreaves Lansdowns reputation can recover from backing Woodfords judgement through these troubled times and I fear that investor confidence in the company might be lost forever.
My view
These two shares will now follow two different paths, in my opinion. I am much more optimistic about WPTC because the shares trade at a discount of the funds assets value, and if Mr Woodford leaves then the investors might return.
On the other hand, Hargreaves Lansdown is not cheap. The shares started trading at about 2 in 2007 and, at the current price of 18.80, this represents a performance of around 850% over the 12-year period or about 25% per year.
Despite the Equity Income Fund scandal and WPTCs poor performance, Hargreaves Lansdown is still up by about 3% a year to date. With a current price-to-earnings ratio of 38.17, Hargreaves appears expensive and its dividend yield of 1.62% isnt all that attractive, either.
What next?
The next earnings season in August promises to be interesting because Hargreaves has the highest revenue target in its history, with an expected turnover of 245m.
I dont see how this objective could be achieved because the extent of the damage is not yet known, and this uncertainty might penalise the share price until then. The decision to cut fees, announced by the companys CEO, for clients who have invested in WPTC reinforces this view. And, in the long term, the loss of investor confidence might well further depress the share price.
