Around twenty years ago when some of us in Marcellus were young brokers in the stockmarket in London, a visit to Invesco Perpetual’s campus just outside London in the picturesque town of Henley was like a visit to the Vatican. Inside the campus presided the then ascendant superstar of British fund management, Neil Woodford. Once seen as Britain’s answer to Warren Buffett, Mr Woodford’s career has flamed out spectacularly in recent years. As is the norm these days, after the fall comes the post-mortem. Two books by senior British journalists dissect what went wrong for a man who even five years ago seemed invincible. Mr Woodford’s failings are all too human and his story contains lessons not just for fund managers like ourselves but for millions of middle class investors who entrust their savings with star fund managers.
The Reuters article reviews Owen Walker’s book “Built on a Lie: The Rise and Fall of Neil Woodford and the Fate of Middle England’s Money”. Mr Walker makes the interesting point that Mr Woodford’s rise was built around two big bets that he had the sagacity to avoid: “During the internet boom of the late 1990s, Woodford shunned technology companies because he failed to understand their stratospheric valuations. When the bubble burst, his High Income fund outperformed. Years later, he made a similar astute call to avoid bank stocks, avoiding losses when they tumbled during the financial crisis.”
Woodford’s fund at Invesco Perpetual outperformed spectacularly on the back of these two big calls. Money poured into these funds and some of us at Marcellus were investors in these Invesco Perptual funds using our pension fund corpus. Mr Walker then makes another insightful point that has immense relevance for Indian HNWs and their reliance on wealth managers’ recommendations: “The investors who eagerly followed Woodford knew little of the risks he was taking with their money. This vulnerability was a result of sweeping changes to Britain’s pension market. Walker, a journalist at the Financial Times, explains how the closure of company-supplied final salary retirement schemes forced savers to manage their own pensions. Confronted with thousands of products savers relied on financial advisers, many of whom were loyal to Woodford, as well as “best buy” lists from groups like Hargreaves Lansdown. The 7 billion pound wealth manager supported Woodford until the end.”
Buoyed by this success, Neil Woodford quit Invesco Perpetual in 2014 to launch his own shop, Woodford Investment Management. Within five years, the new firm was managing GBP 18 billion raised from British institutional investors (pension funds, local governments) and HNWs. Whilst the fact that many of his larger listed market bets misfired can be attributed to poor judgement, Mr Walker points to several systemic issues which bedevil large funds across the world. Firstly, “The lack of liquidity in Woodford’s funds hastened his demise. When Kent County Council, one of his loyal clients, yanked its 263 million pound investment, Woodford did not have the cash to meet the demand. While savers believed they had instant access to their money, his unlisted holdings were difficult to sell, while his positions in listed companies had become so large that they could not be liquidated without further depressing the price.
This flaw, which goes far beyond Woodford, is the lie of the book’s title. When former Bank of England Governor Mark Carney was asked about the Woodford implosion at a parliamentary hearing, he explained that the problem could be systemic for large parts of the asset management industry.”
Secondly says Mr Walker, “…regulators share part of the blame. The UK’s Financial Conduct Authority authorised Woodford’s new firm in record time even though he faced an open investigation into his dealings at Invesco. The regulator also allowed Woodford to use outsourcing firm Capita Asset Services as a kind of external regulator, or Authorised Corporate Director, even though the fund manager was also the largest shareholder in the provider’s parent company.”
Thirdly, “Internal checks and balances also failed. In one incident described in the book, Woodford planned to invest $250 million into U.S. bioscience company Evofem, despite having only met an executive from the San Diego-based company twice in London. When the Equity Income fund came close to breaching the 10% limit on assets invested in unquoted companies, he pressured some of those firms to list their shares on the obscure Guernsey Stock Exchange.”
The second book on the Woodford debacle, “When the Fund Stops” by David Ricketts gives us a behind-the-scenes biographical analysis of the fund manager’s career: “After graduating from Exeter University in 1981, his first experience in the finance world came as an admin clerk at a commodities merchant. A dreary role, but a move into fund management a short time later set him on his destined career path. Working his way up the ranks, he got the job that made his name as a fund manager at Perpetual (later Invesco Perpetual) in 1988.”
Ricketts’ book also highlights how quickly Woodford’s massive corpus unwound once it became clear that his holdings were illiquid. Woodford’s flagship fund started underperforming in 2017 and within two years the whole construct unravelled: “By the end of May 2019, the Equity Income fund had lost 17% over three years compared to a 28.4% rise in the FTSE All-Share, with total assets now around a third of their peak at £3.71 billion. The deathblow came in June when major investor Kent County Council decided to withdraw their c. £200 million holding with immediate effect. On the back of that decision, fund administrator Link quickly suspended the fund, leaving shocked investors unable to access their savings.”
The Reuters article reviews Owen Walker’s book “Built on a Lie: The Rise and Fall of Neil Woodford and the Fate of Middle England’s Money”. Mr Walker makes the interesting point that Mr Woodford’s rise was built around two big bets that he had the sagacity to avoid: “During the internet boom of the late 1990s, Woodford shunned technology companies because he failed to understand their stratospheric valuations. When the bubble burst, his High Income fund outperformed. Years later, he made a similar astute call to avoid bank stocks, avoiding losses when they tumbled during the financial crisis.”
Woodford’s fund at Invesco Perpetual outperformed spectacularly on the back of these two big calls. Money poured into these funds and some of us at Marcellus were investors in these Invesco Perptual funds using our pension fund corpus. Mr Walker then makes another insightful point that has immense relevance for Indian HNWs and their reliance on wealth managers’ recommendations: “The investors who eagerly followed Woodford knew little of the risks he was taking with their money. This vulnerability was a result of sweeping changes to Britain’s pension market. Walker, a journalist at the Financial Times, explains how the closure of company-supplied final salary retirement schemes forced savers to manage their own pensions. Confronted with thousands of products savers relied on financial advisers, many of whom were loyal to Woodford, as well as “best buy” lists from groups like Hargreaves Lansdown. The 7 billion pound wealth manager supported Woodford until the end.”
Buoyed by this success, Neil Woodford quit Invesco Perpetual in 2014 to launch his own shop, Woodford Investment Management. Within five years, the new firm was managing GBP 18 billion raised from British institutional investors (pension funds, local governments) and HNWs. Whilst the fact that many of his larger listed market bets misfired can be attributed to poor judgement, Mr Walker points to several systemic issues which bedevil large funds across the world. Firstly, “The lack of liquidity in Woodford’s funds hastened his demise. When Kent County Council, one of his loyal clients, yanked its 263 million pound investment, Woodford did not have the cash to meet the demand. While savers believed they had instant access to their money, his unlisted holdings were difficult to sell, while his positions in listed companies had become so large that they could not be liquidated without further depressing the price.
This flaw, which goes far beyond Woodford, is the lie of the book’s title. When former Bank of England Governor Mark Carney was asked about the Woodford implosion at a parliamentary hearing, he explained that the problem could be systemic for large parts of the asset management industry.”
Secondly says Mr Walker, “…regulators share part of the blame. The UK’s Financial Conduct Authority authorised Woodford’s new firm in record time even though he faced an open investigation into his dealings at Invesco. The regulator also allowed Woodford to use outsourcing firm Capita Asset Services as a kind of external regulator, or Authorised Corporate Director, even though the fund manager was also the largest shareholder in the provider’s parent company.”
Thirdly, “Internal checks and balances also failed. In one incident described in the book, Woodford planned to invest $250 million into U.S. bioscience company Evofem, despite having only met an executive from the San Diego-based company twice in London. When the Equity Income fund came close to breaching the 10% limit on assets invested in unquoted companies, he pressured some of those firms to list their shares on the obscure Guernsey Stock Exchange.”
The second book on the Woodford debacle, “When the Fund Stops” by David Ricketts gives us a behind-the-scenes biographical analysis of the fund manager’s career: “After graduating from Exeter University in 1981, his first experience in the finance world came as an admin clerk at a commodities merchant. A dreary role, but a move into fund management a short time later set him on his destined career path. Working his way up the ranks, he got the job that made his name as a fund manager at Perpetual (later Invesco Perpetual) in 1988.”
Ricketts’ book also highlights how quickly Woodford’s massive corpus unwound once it became clear that his holdings were illiquid. Woodford’s flagship fund started underperforming in 2017 and within two years the whole construct unravelled: “By the end of May 2019, the Equity Income fund had lost 17% over three years compared to a 28.4% rise in the FTSE All-Share, with total assets now around a third of their peak at £3.71 billion. The deathblow came in June when major investor Kent County Council decided to withdraw their c. £200 million holding with immediate effect. On the back of that decision, fund administrator Link quickly suspended the fund, leaving shocked investors unable to access their savings.”
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
