There was a time when Neil Woodford was the best-known and most-trusted investment fund manager in the United Kingdom, and probably all of Europe. He was the man with the golden touch, and he could do no wrong. At one point, he had more than £33bn in funds under his personal management – more than any other fund manager in his home country.
Today, investors are blocked from making any further withdrawals from his rapidly-depleted Woodford Income Fund, is facing lawsuits from angry investors, and may find himself under investigation from the British courts. So how did it all go so wrong so fast for someone who had such an unblemished track record?
In The Beginning
To understand the problems with the fund, we must first understand who Neil Woodford is. Unlike some figures who’ve made a sudden entry into the world of investment management, experienced quick success, and burned out just as quickly, Woodford is an experienced hand. Before setting up his own funds, he spent more than twenty-five years working for Invesco Perpetual – one of the most significant such companies in the United Kingdom. He was considered to be exceptional at his job, and was awarded a CBE by the Queen for his services to the British economy during 2013.
After all those years honing his craft, Woodward left in 2014 to set up his own fund. Given his connections and his reputation, finding people eager to invest in him wasn’t an issue. He has over £1bn under management within his first few weeks of opening, in some cases before those investors had even seen which stocks he intended to invest their money in. On the surface, there was nothing to worry about. Investments in firms like GlaxoSmithKline, AstraZeneca, and Imperial Tobacco were the largest shareholdings, and were stable, reliable firms upon which profits were sure to be built. It was the smaller investments that people weren’t paying attention to, and it’s in those smaller investments that problems started to develop.
The Constant Gamble
It’s often said that investors are like gamblers, and while in some ways that’s true, in perhaps the most important ways, it isn’t. High-stakes stock market investors will place their money in funds, knowing full well that there isn’t a guarantee of a return. They expect some volatility, and they’re generally prepared to accept a depreciation of the value of their investment so long as assurances can be given that values will increase further down the line. You could easily approximate this to the world of gambling. Any stake placed on any online casino game is at risk, and there’s no guarantee you’ll make much of a return on it – if indeed you make anything at all. What keeps you playing is the prospect of a jackpot, which can come on any spin, and at any time. The same is true of investment – a fund can suddenly go up, and everyone’s instantly in profit.
The key difference is that investors have the chance to pull their money out if things start to go wrong. You can’t ask an online casino or its sister sites to return fifty percent of what you’ve spent, because you’re not happy with what you have made on it. You can ask that question of a fund manager. In the case of Neil Woodford, Kent Council asked for £250m back, and Woodford felt he had no choice but to suspend the fund.
Backing Losers
As recently as May 2017, the value of the Woodford Equity Income Fund stood at £10.2bn, and everything looked rosy. Less than twelve months later, it had dipped below £5bn. Today, at the point trading was suspended, it’s fallen below £4bn. Much of the lost value is down to panicking investors pulling their money out of the fund before Woodford suspended it, but there were triggers which prompted that panic.
Some of those issues couldn’t have been foreseen. Imperial Tobacco is currently trading at below the level they were in 2014 when the fund was founded, which would have been unthinkable at the time. Woodford also had no way of knowing that Rolls Royce, in which he’d also invested heavily, would be stung by a fraud investigation which severely damaged its value. Their value, too, is now below 2014 levels.
Where he’s seen serious loss, though, is in the funds which never looked like solid bets to begin with. He bought almost a 30% stake in Utilitywise, a brokerage firm helping customers to switch providers. They folded in February 2019. He also owned almost 30% of Purplebricks, an upstart internet-based estate agency with a heavy marketing presence that appeared buoyant during its first year of trading, but then lost 64% over the course of the past twelve months, leaving Woodford carrying the can. Woodford is the majority shareholder of the old-fashioned loan company Provident Financial, which makes its money making and taking cash loans on people’s doorsteps. Its business model already appeared hopelessly outdated five years ago, and it’s been no surprise to anybody to see it lose three-quarters of its value during that time, but for some reason, Woodford held onto the shares, and his fund suffered as a result. The list goes on and on. A large investment fund is capable of swallowing and overcoming one or two of these situations occurring simultaneously. For so many to occur at once can be lethal, and the concern of the fund’s investors is completely understandable.
What Happens Now?
Woodford isn’t going to quit. He’s spoken of taking time to shore up the investment portfolio while trading is suspended, although it’s not immediately obvious what this might mean. Only two of the ten largest shareholdings within the fund are currently listed within the FTSE-100 and will, therefore, be easy to sell and raise capital. The remainder of the portfolio is on shaky ground – and of course, the circumstances of sales are bound to impact the return he gets from them.
All manners of things have been blamed for the difficulties. Brexit has been mentioned, as has misreporting by some of the firms that large sums have been invested in. In the near future, though, those excuses will be immaterial. All that will matter to Woodford and his investors is whether the fund can be revived and repaired – and if not, how much money those investors stand to get back.
