On October 15 2019, Neil Woodford, once Britain’s top-performing fund manager, was removed from the managership of his flagship Woodford Equity Income Fund (WEIF) by the fund’s administrators, Link Fund Solutions. Hours later, he announced the closure of Woodford Investment Management and resigned as manager of his two other funds, Woodford Patient Capital Investment (WPCT) and LF Woodford Income Focus fund.
This ignoble end to the career of the most successful stock picker in Britain, once known as Britain’s answer to Warren Buffett, resulted from recent investments which had disregarded Buffett’s cautious and time-proven investment strategies. It abruptly terminated a career that started in the City of London in 1981 with Reed Pension Fund, from where Woodford moved to TSB. He then became a fund manager with Eagle Star in 1987, before embarking on a highly successful 26-year career with Invesco Perpetual, an investment manager based in Henley-on-Thames in Oxfordshire. He left in April 2014 to branch out on his own, setting up Woodford Investment Management. Woodford then launched Woodford Patient Capital Trust in April 2014, to invest in early-stage innovative healthcare companies, followed by LF Woodford Income Focus in April 2017.
While at Invesco, Woodford successfully predicted the mid-Nineties dotcom bubble and the 2008 Global Financial Crisis. He consistently obtained high returns on investments, became a widely respected and influential figure, and was awarded the CBE in the 2013 Birthday Honours for services to the economy. Even up to the day that his flagship equity income fund was suspended, he was being listed on the Wealth 50 list of recommended best-buy funds by the investment supermarket Hargreaves Lansdown, Britain’s largest retail investment platform.
So, where did it all go so wrong? A Sunday Times report on March 3 2019 drew attention to a multitude of under-performing and illiquid assets among WEIF’s holdings. A subsequent run of investor withdrawals or redemptions led to suspension of all investor dealing by WEIF by June 3 2019. This suspension was triggered by attempts by Kent County Council to withdraw an investment valued at £224 million. WEIF’s assets were frozen- these were valued at £3.1 billion on August 31 2019. WEIF investors were unable to withdraw their invested money from June 3 2019 onwards. Despite this, Woodford continued to take in his management fees, adding to investors’ anger and frustration.
Woodford had diversified his investment portfolio to include higher risk investments in small, speculative, and often private and unlisted companies-in particular, biotech and healthcare startups, which require a high level of specialist knowledge. This also led him to be in breach of regulatory limits on his holdings of unquoted stocks. This strategy starkly contrasted with Buffett’s focus on long-term investment in high-quality, blue-chip companies with excellent track records. It also did not meet Woodford’s own stated belief in the proper valuation of a business as the most reliable predictor of future investment return. If anything, many of the businesses that he was investing in may have been over-valued.
Now, back to the basics. An investment fund is a pooled investment of money from a variety of individuals and corporate institutions. A professional fund manager typically invests this money in a wide range of assets (UK shares, global shares, bonds, cash, property) and actively manages the resulting diversified portfolio, both to spread risk across various sectors and to maximise the returns on investors’ money. Fund management carries the risk that money invested can easily be lost and that returns are by no means guaranteed. All of this should be familiar to those who diligently read through the small print of investment documents.
Woodford’s spectacular failure has brought financial distress to hundreds of thousands of investors. Link will start selling off WEIF’s assets from January 17 2020, thereby giving investors the required three months’ notice. Investors are not likely to get all, or even most, of their money back, as the market value of WEIF’s assets is likely to have fallen significantly. However, the Financial Services Compensation Scheme (FSCS) can provide compensation cover of up to £85,000 per eligible person per authorised financial services firm that has collapsed, but only after it is satisfied that the firm lacks sufficient assets to meet any claims against it.
The message is clear. Investment is a risky business. The type of investment and the fund manager you choose depends on how much risk you are prepared to accept and how long you are prepared to invest your money for-in other words, whether you are seeking income or capital growth. A track record of highly successful investments does not prevent a fund manager from changing behaviour and adopting a riskier strategy, with all its undesirable “collateral” side effects, which may include you. You have been warned.
Ashis Banerjee (risk-averse investor)