Wednesday 23 October 2019 6:55 am

Let's take a closer look at Neil Woodford’s dubious investment decisions

The man with the Midas touch. That was how people saw Neil Woodford only a few short years ago.

But things didn’t work out that well for King Midas in the end, and the same can be said for the former star manager, whose reputation is in tatters and whose investment empire now set to close. 

During three decades as a fund manager, Woodford was renowned for making controversial investment decisions – for choosing stocks that were unloved and undervalued by the markets, but which had potential to grow. 

While it’s impossible for stockpickers to make the right calls all the time, Woodford increasingly moved into riskier stocks, and very few of these recent bets paid off. His flagship fund, which held £3.1bn assets on 31 August, has underperformed since 2017, and he put investors’ money on the line by having an excessive allocation to early-stage companies. With the fund’s wind-up, BlackRock and Park Hill have been given the difficult task of selling off these assets. 

Here, with help from AJ Bell, we look at some of the small companies that raise a red flag – whether in terms of performance, liquidity, sector, profitability of the underlying business, or overlap with Woodford’s other funds. 

For all of the companies mentioned, Woodford has more than a five per cent stake.

Biotech bets

Woodford’s allocation to biotech companies has really done him no favours, with three stocks in this sector topping the bad performance list over the past year. 

Of all the small-cap stocks in the Equity Income fund, biotech firm Hvivo has been by far the worst performer in terms of share price in the past 12 months, plummeting by 67.7 per cent. 

The business, which develops vaccines for viruses like flu, has also been the sixth worst performer since the fund was suspended back in June. Cost-cutting efforts and efficiencies might have improved its outlook since 2018, but it still reported a loss of £3.8m for the first half of this year. Woodford currently has a 18.8 per cent stake.

Another biotech company, Midatech Pharma, is the second worst performer over the past year, with its share price falling by 65 per cent. While the firm reduced its loss compared to the previous year, it was still down £4.42m for the six months to 30 June 2019.

The third worst performer for the year is Tissue Regenix Group, dropping 64.7 per cent. It has also fallen by a staggering 43.4 per cent since June. Woodford owns more than a fifth in the company. 

Dan Coatsworth, stock market analyst at AJ Bell, says that this medical devices group could be particularly difficult to offload. 

“Its share price has been in a falling trend since the start of 2017, suggesting that the market doesn’t have a strong appetite for the stock. Now only worth £37m, the company has recently been borrowing money to relieve working capital pressures.”

Other biotech names like Synairgen (sixth place), Sensyne Health (eighth), and Arix Bioscience (tenth) also appear in the list. 

Individual companies aside, Woodford’s decision to allocate so extensively to this sector was worrying. Indeed, Coatsworth says biotech is such a specialist area that it can be difficult to find buyers. 

“Generalist fund managers often shun that sector because they feel you need a science degree to make any sense of a company, and model its future earnings potential,” he explains. “That greatly narrows the pool of potential buyers, which means it could take longer to offload any biotech holdings.” The analyst also warns that this leaves the ball in the potential buyer’s court, as third-party investors know that there is limited competition for the stock and can demand a discounted price.

Hitting a Purplebrick wall

But it’s not just the biotech sector where you find poor performing shares held by Woodford. Purplebricks has also suffered over the past 12 months, falling by 53 per cent. 

The online estate agent has had a bad run, having cut its revenue forecasts and made a loss in the 2018-19 tax year. It also decided to withdraw from the US market. However, since the start of June, its share price has climbed by 6.4 per cent. 

Coatsworth says that Purplebricks will be easier to sell compared to biotech firms, pointing out that the 15.5 per cent stake might be of interest to German media group Axel Springer, which already owns 26.6 per cent of the business. “Buying Woodford’s full stake would trigger a mandatory takeover offer, as Axel Springer would go over the 29.9 per cent threshold,” he adds.

One particularly worrying aspect about Purplebricks is that Woodford holds this company in another of his funds, the £300m Income Focus vehicle, which is also set to be wound up.

Think Logistically

Another poor performing company that Woodford is exposed to across two of his beleaguered funds is Eddie Stobart Logistics. It’s the seventh worst performing stock, having fallen 45.5 per cent in a year. It has also dropped by 13.4 per cent since the Equity Income fund suspended. 

In August, the haulage company – of which Woodford has a 22.89 per cent stake – was mired in an accounting scandal, which led to the resignation of its chief executive and the temporary suspension of its shares. 

But the problems don’t end there, as a profit warning for the company was issued last month, saying earnings for this year will be below expectations.

The Muddy Waters dispute

Burford Capital has been the worst performing stock since the fund suspended, with the share price sinking by 50.2 per cent since June. The litigation financer has also done poorly for the year, falling by 52.4 per cent. 

In August, Burford came under attack by US short-seller Muddy Waters, which sent the share price of the company into a tailspin.

Muddy Waters said that Burford was a “poor business masquerading as a great one” and criticised its accounting practices. Burford has now gone to the High Court to ask the London Stock Exchange to disclose the identities of those involved, after claiming it was the subject of market manipulation. 

Regardless of the outcome of that case, the dispute looks unlikely to end any time soon, and the share price hasn’t recovered since. This leaves the liquidators with a difficult task on their hands when it comes to getting a good price for the stock – of which Woodford owns 9.4 per cent. 

The good, the bad, and the ugly

A string of other names, including Redde, Allied Minds, and Provident Financial have also caused the performance of Woodford’s fund to deteriorate. All these stocks are held across at least two of Woodford’s funds.

However, it’s not all bad, as a few investments have paid off over the past 12 months. For example, Crest Nicholson is the best performer, having jumped 41.6 per cent, Countryside Properties is up by 21.9 per cent, and PayPoint has increased by 6.1 per cent.

The uniting feature of these three companies is that they are all in the FTSE 350 – at the larger end of the scale in terms of small-cap companies – and have a proven track record. 

Perhaps if Woodford had stuck to his original strategy of buying small but established household names, rather than veering into startup territory, he wouldn’t be in the trouble he is in today.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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