Hargreaves Lansdown (HL)

I recently spoke about Burford Capital and the potential troubles it faces in the short-term due to the suspension of Woodford’s Equity Income Fund. Another stock that is also struggling, as a result, is Hargreaves Lansdown, the investment service provider, with its share price dropping over 20% in the last month.

This is a considerable drop and requires investors to consider if this is a short term reaction to recent events or the beginning of a longer-term shift. Therefore, investors need to identify if this a sign to sell as the company is on a long-term downward trend, or is this a buying opportunity due to market overreaction?

WOODFORD

The recent dismal performance and resulting closure from multiple redemptions of the Woodford Fund has resulted in a backlash on Hargreaves Lansdown share price. This is because the company had continued to champion the fund, supporting it via its new and updated Wealth 50 platform when perhaps other funds were more justified.

The disappointment for investors looking from the outside in is the apparent lack of appropriate procedures and systems to prevent the Woodford situation from occurring. From a market perspective, Hargreaves Lansdown had crossed the appropriate level of support for Woodford, when data sources suggested the contrary. As such, investors now feel that Hargreaves Lansdown had not put their clients’ interests first when advising investment into the fund, which is now facing severe problems.

As a result, the company’s support of the fund and overall strategy are under attack from investors, which has caused its share price to tumble. Additionally, investors trust in the firm and the wider market as a whole has also come under greater scrutiny. The clear direct drawback for the firm is the loss in reputational value, which has suffered as a result of the event.

In the wider context, a loss of trust in the investment industry will mean that investors are less likely to engage in capital markets due to a fear of how their funds will be handled, such as the case at Hargreaves Lansdown which will indirectly influence the firm due to a decrease in demand.

BUSINESS FUNDAMENTALS

From my perspective, the core business is still the same. It’s true that the firm has made a mistake by over supporting the fund but I can’t see this resulting in a decrease in returns for too long. The company is still the market leader in the UK and with more people becoming increasingly conscious of wealth and retirement, the brand is still positioned to capture future growth.

In a way, the influence of the Woodford fund could have a similar effect that Brexit is having on the UK economy. Until Brexit is resolved, it will continue to put downward pressure on UK share prices and the same could be true for Hargreaves Lansdown and the Woodford Fund debacle.

However, I think once Hargreaves Lansdown can leave this Woodford issue behind, then it will continue to grow and with it, leave behind its lagging share price too. Supporting this, though large investors are removing their support for Woodford this does not seem to be translating into flows away from Hargreaves Lansdown’s platform itself. This suggests that investors are still happy to use the firm’s services and therefore the backlash should only have a short term effect on the stock’s performance.