The year 2013 had been a good one for the star stockpicker Neil Woodford.
Invesco’s key moneyman had already bagged a CBE for services to the economy in June and was now readying to strike out on his own with a solo fund, parting ways with the firm where he built his reputation.
More success followed and by June the next year the Berkshire-born investor had raised a record £1.6bn for his new venture, dwarfing similar vehicles launched by rival managers. In its first 12 months, Woodford Equity Income fund delivered an 18 per cent return to investors.
“This weekend, hundreds of thousands of small investors – many of them pensioners – will be saluting Britain’s very own Warren Buffett,” wrote a glowing BBC profile at the fund’s year anniversary in 2015.
He was, according to the headline, “the man who can’t stop making money”.
Just nine years later, and that reputation lies in tatters. The once feted fund manager faces a mass campaign to strip him of his 2013 gong. “Disgraced” now prefixes his name and the narrative of a hubristic investor who believed his own hype has taken hold in the City and beyond.
But the man at the heart of that tale has a slightly different version of how it all unravelled.
In his first media interview in over three years – and the first since a landmark ruling on the fund’s downfall by the Financial Conduct Authority – Woodford tells City AM his side of a story that shook the City, left hundreds of thousands of people out of pocket, and reshaped the culture of retail investment in the UK.
And he is pointing fingers in plenty of directions.
What we know about Woodford
Woodford climbed quickly up the ranks at Invesco with a reputation for picking winners on London’s stock market, eventually managing around £33bn for the company.
One journalist quipped his former employer would be “wetting themselves” when he announced his exit, such was his reputation for sucking capital towards him and beating the performance of London’s indices.
“I have met businesses in recent weeks that have immense potential and offer fantastic investment value,” said Woodford at the launch of his solo venture.
“My entire focus is finding companies like this that I believe can deliver long-term value to the investors that have the confidence to invest in my fund.”
It was a continuation of the mantra on which Woodford had built his former success: find quality companies and hold the stocks for a typical horizon of 15 years.
He had tasked an Aussie fund administrator called Link Fund Solutions to be the fund’s authorised corporate director (ACD), meaning it had regulatory responsibilities for the management of the fund, overseeing and monitoring it in areas like liquidity risk.
Scores of investors began flocking to the vehicle due to its promotion on investment platforms and the manager’s growing reputation as a market sage.
“Neil Woodford was hailed as an investment guru by the financial press and investment platforms, particularly Hargreaves Lansdown,” one investor later said.
The fund eventually swelled to hundreds of thousands of investors and was worth £10.2bn at its peak.
But in the years following the 2016 Brexit referendum, that performance began to falter. Woodford’s returns began to sag behind the market and dent his reputation for unwavering growth.
Investors began to pull money from the vehicle, first in drips, then in a torrent. Finally, Kent County Council withdrew a significant chunk of cash in June 2019.
Link moved immediately to block investors from withdrawing their cash – and the shattering of the myth of Woodford was complete.
But, speaking to City AM, the fund manager is defiant. He says he was caught just as off guard as his investors by Link’s decision to block withdrawals.
“I think people believe that for 12 months leading up to the suspension, we were being told on a week-by-week basis that you need to improve the liquidity and if you don’t, we’re going to have to suspend,” Woodford says.
“There wasn’t a single mention of that. I found out they intended to suspend 15 minutes before they did actually suspend.”
At the heart of the initial panic, and central to the questions following the fund’s collapse, has been the liquidity risks posed by his bets on unlisted companies.
Law firms and the regulator suggested he took dangerously outsized positions in firms that could not quickly be turned into cash. However, the manager has now claimed that his emergency actions in the weeks following prove otherwise.
Following the suspension, Woodford says he was able to create around £1bn of cash in six to eight weeks, deploying it into FTSE 100 and FTSE 250 stocks.
“64 per cent of that cash was created from sales of securities considered to be the illiquid part of the portfolio that would take over 180 days to sell,” he says.
“Even confronting an equity market that knew that I was forced to sell, I achieved better sale prices than estimated by Bloomberg and considerably quicker than estimated.”
He claims that sale of assets raises questions over whether the fund needed to be shuttered at all, given the high level of liquidity he generated in the months after suspension.
“Now, how I took a portfolio from one that was supposed to be totally illiquid to one that was very liquid, is a question that has never been addressed or answered,” Woodford adds.
“And the answer to that question, of course, is that I believe the fund was sufficiently liquid, it could have met redemptions.”
Fair value assets
Although the commentary so far has been about the fund’s overall liquidity level, Woodford believes Link’s focus when deciding to suspend the fund was on the level of fair valued assets within the fund.
Fair value pricing is used when a company is listed but has limited or no dealing. Link had used it on the unquoted companies Woodford owned that had debuted on niche Guernsey stock exchange, TISE.
The ACD had approved fair valued assets coming into the portfolio as late as April 2019, when it allowed Woodford to keep a holding in Benevolent AI when it was listed on TISE, the manager says.
However, the percentage of securities subject to fair value pricing (excluding unquoted companies) in Woodford’s portfolio increased significantly between 2017 and the month before the fund was suspended, from 0.2 per cent of assets to 12.4 per cent, data from the FCA showed.
When the fund was suspended, the combined ratio of both unquoted companies and fair value assets had reached 21.5 per cent of Woodford’s portfolio. The FCA had previously ordered Link, in April, to bring the ratio below 10 per cent within six months.
So why didn’t Woodford simply reduce the fair value assets in the fund?
“We initiated a process to sell all the private assets in April before the fund suspension, but, following Link’s decision to suspend, we weren’t allowed to get the process going and the people that we contracted with weren’t allowed to go out to the market to sell the assets until the commercial terms had been agreed between Link and them,” he says.
“Link didn’t sign the documents that they needed to sign to allow us to get going on that process for over two months after the suspension. So I don’t think that document was signed until the start of August.”
Link then decided to liquidate the fund just four months after its suspension, even as many funds in the past have stayed suspended for a year or longer.
Link Fund Solutions declined to comment.
The fund’s liquidation sent shockwaves through the financial industry and blocked hundreds of thousands of investors from accessing their cash.
Retail investors have reported no longer being able to afford mortgages, losing their pensions, and having to make cutbacks to afford their day-to-day living expenses thanks to the scandal.
“We have lost a very significant amount of money which we can ill afford as pensioners,” said one investor.
The process to refund investors took years, with Link eventually paying them back partially out of their own pocket to escape further penalties from the Financial Conduct Authority.
What this means
So, where does the responsibility for the collapse of the fund lie?
The Financial Conduct Authority blamed both Woodford and Link for the collapse, with a decision issued in April, ultimately presenting the former fund manager with a warning notice.
As a warning notice is not a final decision, the FCA’s Regulatory Decisions Committee will now decide what legal action, if any, to take against Woodford and his company.
Woodford lays the blame squarely on Link, stating that the ACD said the FCA had signed off on the liquidity framework he was using, even showing him a PowerPoint presentation with the details of the framework that they had presented to the regulator.
He also claimed that Link had told him that the liquidity framework used by his fund “was materially similar to the framework that they were using for all their clients”.
“Apparently, I am now the only person who should have known that it was deficient. Nobody in the FCA, nobody in Link, nobody in the depository, nobody in Woodford Investment Management’s risk and compliance department,” Woodford added.
He noted that while the FCA’s report on the incident had accused him of a “defective understanding of responsibilities”, it had not accused him of breaking any rules, even after five years of investigation.
Meanwhile, Link would have been fined for £50m by the regulator, if it had not agreed to pay out settlement cash to Woodford’s investors who were still trapped in the fund.
The lack of resolution – and the fact that Woodford himself has not been reprimanded – has left many investors despairing for the future of the UK financial industry.
“I feel completely let down by the financial regulatory services in the UK and have lost all confidence in investing in anything other than high street banks and building society savings schemes,” one Woodford investor said.
“It’s a stitch up. Investors lose out. FCA and Link pat themselves on their backs and carry on doing bad things,” added another.
Woodford has escaped formal sanction over the vehicle so far, and has returned as a financial commentator on his blog.
But five years on, his message is not one of apology, but a wider warning for the industry as a whole and the dangers of becoming a scapegoat.
“If you are a fund manager, you may be worried by the implications of this case,” he says.
“Because even if you have managed your investment risk within the framework applied by your ACD, approved by the depositary, with the visibility of the FCA, you may still be expected to test and challenge that framework, and could be sanctioned for not doing so.”