The implosion of former star stock picker Neil Woodford’s investment empire – which has left hundreds of thousands of pensioners and small investors nursing big losses – has plunged rival fund managers into crisis mode as they try to salvage the reputation of an industry that finds itself under the scrutiny of regulators and politicians.
“We have seen the complete demise of the most famous fund manager the UK has seen for years,” said Adrian Lowcock, head of personal investing at stockbroker Willis Owen. “Investors knew the scenario was bad but the indication from Woodford thus far had been that the fund would reopen. Sadly, many people will be looking at significant losses.”
The fear among stockbrokers is that the demise of Woodford – who once managed £30bn of savings and was referred to as “Britain’s answer to Warren Buffet” – was a near-fatal blow to the public’s confidence in the star fund manager investment model and could lead people to stop investing for their retirement entirely.
“There are hundreds of thousands of individuals who will have put a lot of money into his hands,” Lowcock, said. “There will be people for whom Woodford was their one and only fund, and they could have lost a significant proportion of their pension.”
In an arena unfathomable to many, Woodford, 59, was as close to a household name as it is possible to get in fund management – and for good reason. Anyone who invested £10,000 at the start of his quarter-of-a-century career at Invesco Perpetual would have seen their money grow to almost £250,000 by the time he left in 2013. When he set up his own firm in 2014 he raised £1.7bn in a fortnight.
In 2015, the BBC declared that Woodford was “the man who can’t stop making money”. But two years later it started to go south as a series of bad bets caused his flagship Woodford Equity Fund to drop in value. Investors pulled their money out at such a rate he couldn’t sell assets quickly enough to keep up with demand. The administrator “gated” the fund in June this year to prevent savers from withdrawing any more money. While investors were unable to withdraw money, Woodford continued to collect £65,000 a day in management fees, despite widespread public and political criticism.
Woodford, who lives in a £14m mansion in the Cotswolds and owns a £6.3m glass-walled holiday home in Salcombe, Devon, has made a fortune as his investors, many of whom are on modest incomes, have lost a big chunk of their savings. In the 2017-18 financial year alone, Woodford and his business partner Craig Newman paid themselves £36.5m. Over the past four years Woodford himself has collected £63m.
Woodford’s losses could hit investor confidence in active fund managers in favour of more passive algorithmic trading, which uses computer programs to predict where money can be made, rather than fund managers’ research or intuition.
Investors in Woodford’s Equity Income Fund have already lost 37% of their savings over the past three years, and have been told to expect further declines as administrators, who sacked Woodford as manager on Tuesday, work to wind it up.
The fund has shrunk from £10bn to £3bn as investors withdrew their cash following difficulties at companies he was heavily invested in, including the AA, online estate agent Purplebricks, doorstep lender Provident Financial, and cold fusion firm Industrial Heat.
Asked by the Financial Times in December 2017 if he ever doubted his judgment, Woodford replied: “Daily. You must never, as a fund manager, stick your head in the sand saying ‘Everybody go away, I’m right, I’m right, I’m right.’”
Woodford learned of his removal as manager of the £3bn flagship fund on Monday afternoon, when he and Newman were summoned to a meeting with administrator Link Fund Solutions. His sacking prompted a defiant response, with Woodford saying he could not accept the decision. Hours later, however, he announced he was stepping down from his Income Focus Fund and the Woodford Patient Capital investment trust and winding down his Woodford Investment Management firm with the loss of about 30 jobs.
On hearing the news, Darius McDermott, managing director of online stockbroker Chelsea Financial Services, tweeted: “My statement on this. The official, non-sweary version. The whole situation has been awful for investors in the funds and the trust, and damaging for the industry.
“At a time when people should be saving more, not less, and when UK equities are so out of favour, it is worrying that so much trust has been lost. We now need to work hard to get that trust back.”
There was a lot of swearing in the City and the stockbroker belt at the news from Woodford’s offices on a business park on the outskirts of Oxford. “This was the biggest news in fund management in decades,” McDermott added. “Funds get suspended very, very rarely. There are over 3,000 funds you can buy in the UK, and I can’t remember any fund outside of property that has been suspended, unless there has been some sort of fraud or wrongdoing.
“And this is an even bigger blow, because it is a very big fund. Neil was the biggest investor in the business.”
Bank of England governor Mark Carney said shuttering Woodford’s funds highlighted the structural problem of open-ended investment funds, which allow investors to take their money whenever they like.
Catherine McKinnell, interim chair of the cross-party Treasury committee, said the winding-up of Woodford Investment Management was “the beginning of the end of a sorry state of affairs” which had “raised important questions about the functioning of the funds industry” that the committee would examine.
The inquiry would investigate fund charges, transparency of stock holdings and consider new rules forcing fund managers to reveal the proportion of money held in illiquid assets.
Merryn Somerset Webb, editor-in-chief of investment magazine MoneyWeek, said Woodford made pretty much every mistake you can make. He took on too much money, too quickly, put too much in illiquid holdings, and believed too much in his own hype.
“It is possible to ignore all the rules in fund management,” she said. “But if you do, make sure you don’t break the golden rule: don’t fuck it up.”
Woodford’s bad bets
Woodford bought up almost a third of the estate agent’s shares. The gamble paid off at first but the shares crashed from nearly 500p in 2017 to just above the flotation price of 100p following a profits warning and the ousting of its chief executive. On Tuesday Woodford Equity Income sold two-thirds of its remaining stake at about 110p each.
Woodford funds owned about a quarter of the doorstep lender when a “quadruple whammy” struck in 2017 – a second profits warning in two months, the scrapping of the dividend, an FCA investigation and the exit of its chief executive. Shares that had been worth £26 in 2015 dropped to 580p.
This “cold fusion” company promised to produce nuclear energy at or near room temperature and had attracted a valuation of almost $1bn, despite no scientific evidence the technology worked.