This week, former star fund manager Neil Woodford shocked markets by “gating” his flagship fund. John Stepek and Sarah Moore look at what went wrong, while Max King looks at how Woodford’s former colleagues are getting on now.
“A bonfire of reputation and a terrible moment for investor confidence” is how one “veteran” fund manager described it to the Financial Times this week. “I can’t remember anything quite like this,” another manager, Peter Walls of Unicorn Mastertrust, told Citywire. They were, of course, referring to the “gating” of Neil Woodford’s flagship Woodford Equity Income Fund this week, which left investors large and small (including Kent County Council) unable to withdraw their money until further notice.
What went wrong?
Neil Woodford gained his reputation as a “star” while working at Invesco Perpetual, from 1988 to 2013. His big call was to avoid the tech bubble (and bust) and buy out-of-favour tobacco stocks (see below). He beat the market, and in 2014, with a track record and many grateful investors in tow, launched his own funds, heavily backed by Britain’s biggest broker, Hargreaves Lansdown.
He also changed style. The flagship fund was called “Woodford Equity Income”, but dividends came from a small number of high-yielding holdings while much of the rest of the fund was invested in early-stage biotech and “disruptor” stocks, some of them unlisted.
The fund beat the FTSE All Share in its first two years, bolstering Woodford’s reputation, and by May 2017, assets under management (AUM) had hit a peak above £10bn. By then, however, the fund was starting to lag (in the year to 31 March 2017, it returned 12% vs more than 20% for the FTSE All Share), and it only got worse. As Daniel Grote notes on Citywire, investors began to pull out that summer, unnerved by a profit warning from subprime lender Provident Financial, then one of Woodford’s biggest holdings. Other warnings followed, and by March 2018, weak performance plus redemptions had seen AUM fall to below £7bn. By the time the fund was gated, it was below £3.8bn.
Woodford is hardly the first active manager to make dud calls. The real problem was liquidity – or lack of it. Woodford Equity Income is an open-ended fund. For a detailed definition see here, but in practice it meant that as investors pulled money out, Woodford had to sell out of his liquid (easily sold) equities to repay them. This made it increasingly hard for him to keep the chunk of his fund invested in illiquid or unquoted stocks to below the regulatory limit of 10%. So he turned to ever more elaborate methods of sticking to the letter, if not the spirit, of the rules. He listed some stakes on the Guernsey stockmarket (fine for regulatory purposes, but doesn’t do much for liquidity), and swapped stakes in five unquoted companies for shares in his own Patient Capital Investment Trust. This controversial deal made the extent of the problem very clear – which only exacerbated the “run on the fund”.
The straw that broke the camel’s back appears to be the news that Kent County Council decided to pull out £250m from the fund. Dealing was suspended to allow Woodford “time to reposition the element of the fund’s portfolio invested in unquoted and less liquid stocks, into more liquid investments.”
What now?
If you own the fund, there’s not much to do but wait. It has been suspended for at least 28 days – likely longer. The money is still there, and the fund is being priced daily, so you’ll be able to keep an eye on it, but you can’t get at it. The suspension gives Woodford breathing space to restructure, but it’s never good to be viewed as a forced seller. And odds are that people will queue up to pull their money out when the doors open again, whatever they claim now. We look at the effect on his other funds below.
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