From hero to villain – the downfall of star investor Neil Woodford

The court of public opinion is pretty quick with its judgements. Within hours of Neil Woodford’s decision to temporarily gate his fund, Woodford Equity Income, the country’s most famous star investor has gone from hero to villain.

Silver-tongued market pundits, angry investors and rival managers have wasted no time in giving all manner of cute reasons for the Led Zeppelin fan’s downfall. If you listen closely to the blame-game now going on, his Stairway to Heaven was always going to be a pathway to hell.

They say the Woodford fund held too many illiquid and unquoted stocks and that he had too many distractions such as his ill-thought out decision to back the hostile bid from Non-Standard Finance for Provident Financial. They also say he took many rotten decisions along the path, like pushing for GSK to split up but then selling his stake before the pharma giant did so, missing out on the share price gain.

It’s true that Woodford has made many dreadful calls, particularly chasing good money after bad by backing NSF’s disastrous bid for Provident, a messy affair which was always going to be a blood-bath. You could say that Woodford should have had the foresight to see that investing in a squalid door-step lender like Provident was always going to be an equally squalid investment, with or without the bid. Provident’s shares are down 79% from £32 to £4.46 since Woodford disclosed he owned them back in 2015.

There have been many other bad bets: Woodford had stakes in Purplebricks, Kier, Capital, Stobart, Kier and Allied Minds, all of which have turned out to be duds. Add in Brexit uncertainty and you have the perfect storm in what anyone would admit is a tough investment climate for quoted or unquoted equities.

No surprise then that Woodford’s fund has underperformed over the last few years, and made an 8% loss in the year to April. And yet the fund started off so well: in its first year, investors saw a return of 18% on their money, compared with an average rise of only 2% on the London Stock Exchange.

Since then, it’s been downhill. Figures from FE Analytics show the fund has made a total return of 0.36% since its launch. It’s no surprise either that investors took fright at the fund’s slow-down and have been asking for their money back. Over the last month, £560m has been withdrawn leaving the fund today valued at £3.7bn.

But here’s a contrarian view for an investor who made his reputation as a contrarian. Have Woodford’s critics been too hasty in their judgement that he is the villain of the piece?

Dig a little deeper, and you will find a number of fund managers who are questioning the events leading up to Woodford’s decision to suspend the fund this week, a move designed to protect existing investors and stop any more money flowing out.

The trigger was the decision by Kent County Council, taken at a committee meeting last Friday to review its £6.4bn pension fund, to pull its £238m holding in the fund. Kent County Council told Woodford of its decision on Monday. It was this redemption request which was the trigger that forced Woodford to suspend dealings in the fund. Apparently, Kent County Council, which had put its investment in Woodford’s fund under review in March, had originally decided whether to sell its stake on June 21. But word of the fall in Woodford’s assets in May scared the council, prompting the committee to decide on Friday to go for broke. At the last valuation in April, the holding in the fund was worth £263m but after May’s fall, it is now down to £238m.

Pulling such a big chunk of money at such a febrile time was always going to be risky; for the investor and the fund. So why did Kent County Council ask to pull out all of its money in one go?  Dean Wetton, managing director of Dean Wetton Advisory, says that Kent council’s approach is “odd”, and not the usual way for an institution to withdraw such a large stake. “Usually, you would have a transition manager to manage such an exit. Or you would ask to take a proportion out of the fund, and the rest over a few months.

“Kent’s decision looks very odd, especially if they have FTSE listed stocks which they would want to transfer to another fund rather than risk losing out. You would want to cover your out of market exposure. It looks to me as though Kent’s withdrawal caused the gating. Why would you do that in one go?”

It’s a good question, one that Kent Council should explain. However, Wetton, who has client money in Woodford’s fund, adds that Woodford should also have been quicker to respond to recent withdrawals, and fears over liquidity. “If Neil had gone for a softer gating a few months ago, then maybe he would have avoided this sudden move. He should have been more honest about the mismatch between liquid and illiquid stocks.”

What next? Are Woodford’s other investors, big ones such as Hargreaves Lansdowne whose client money makes up about a third of Woodford’s fund, safe?

Or will there be a bigger run on Woodford’s funds when the gate is open again?

Investors are protected now, and Woodford made the right decision to suspend dealings, probably for at least three months. How long depends on how quickly Woodford can sell his illiquid assets and unquoted stocks, a move which he has promised to do over the next few weeks to shift the balance to zero.

If his first YouTube interview is anything to go by, Woodford clearly gets the mood, and sounds as contrite as you would hope. What investors now want to hear is that management fees will be dropped as a sign of sharing the pain. That’s the least he can do.

What the Woodford affair will almost certainly do is force the Financial Conduct Authority to look more closely at new guidelines it is due to publish on improving regulations for illiquid assets.

The bigger question is whether Woodford’s liquidity problems are an early warning signal of bigger problems brewing in the financial markets, that Woodford is the canary in the coal mine. For my money, Woodford’s problems look unique to Woodford, a combination of several unlucky or misjudged events colliding. When you take big bets, you take big falls.

Retail and institutional investors should be brave enough to take these risks on board, and should be less hasty about throwing brickbats at Woodford. If the fund’s suspension has thrown a few meteorites into the sky, that can only be good practice for the next financial crisis, when it does come.

Maggie Pagano,
Executive Editor,
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