Wednesday 5 June 2019 11:51 am

What's gone so wrong for Neil Woodford?

In the not-so-distant past, Neil Woodford was a bit of hero, beaming among the failed fund managers who had blindly bought into the tech boom of 2000. 

But sometimes stars fall. Or in Woodford’s case, they implode.

News that Britain’s most famous fund manager has blocked withdrawals from his flagship fund may have left us stunned, but it’s not entirely surprising. 

The Equity Income fund has been haemorrhaging money for a while, shrinking from £10bn two years ago to £3.7bn now. This is in no small part down to the fund’s performance, which – to put it mildly – has been awful. The fund is down more than 18 per cent over the past three years, against the IA UK All Companies 23 per cent return, according to FE Trustnet.

While Woodford had made his fortune by buying those stocks that everyone else hates, more recently, some of his unloved holdings – like Provident Financial and Kier Group – have sent his fund’s performance south. 

But it’s not just the performance that has scared off even Woodford’s most loyal supporters. The fund has been grappling with other, arguably more worrying, structural problems. 

Take, for example, the fund’s high exposure to unquoted companies. It’s thought that its exposure was closer to 18 per cent, surpassing the regulator’s 10 per cent ceiling, and making the fund far riskier than many retail investors had bargained for. 

Back in 2014, the Financial Conduct Authority slapped a £18.6m fine on Woodford’s former employer Invesco Perpetual for exposing investors to greater risk than they expected. The watchdog is also currently consulting on new rules to further protect investors who hold illiquid stocks, particularly in stressed market conditions.

In a bid to reduce the illiquid assets, Woodford embarked on a controversial move in March, swapping his unquoted stocks for shares in his own £964m Patient Capital trust.

In a portfolio update, published last month, he pledged to cut the unquoted holdings to less than 10 per cent of the portfolio by the end of the year, but this failed to calm concerns. In truth, the panic had already set in, spreading like wildfire. And once the run starts, it’s difficult to make it stop. 

The deluge of redemptions from the fund has forced Woodford to lock existing investors in. Admittedly, it’s a mechanism that protects investors’ cash, helping the fund manager bide his time as he sells off some assets, but given that we’ve known about these issues for some time, you’d think that action would have been taken earlier to try to protect investors.

“The Woodford Equity Income fund has been a slow-motion car crash since June 2017,” says Damien Fahy from Money to the Masses. In fact, institutional investors started cashing in a while ago, with Jupiter Merlin pulling £300m from the fund in 2017.

And given the glaring problems, you would expect the fund to have been dropped from recommended lists. Except the UK’s largest investment platform Hargreaves Lansdown kept the fund on its Wealth 50 list up until Monday, when news emerged that it had been suspended (of course, you can’t recommend a fund which is unavailable to buy). While around seven per cent of Hargreaves’s multi-manager funds are invested in Woodford Equity Income.

“The problem for armchair investors is that platforms continued to promote a fund manager who stubbornly stuck to his views,” says Fahy. “Hargreaves Lansdown only removed Woodford’s fund from their best buy list yesterday after the horse had bolted.” 

When City A.M. put this to Hargreaves, head of investment analysis Emma Wall said that Woodford is still a compelling fund manager: “Neil is very exposed to domestic stocks, and with ongoing political uncertainty in the UK, it’s created the perfect storm. 

“He’s no stranger to investing in unloved stocks, but this time around there is too much going on for people to be forgiving. And unfortunately that’s led to his hand being forced, and the fund being gated.”

The issue has certainly thrown into question the responsibility of these best buy lists. “People take these as the basis for making their own investment decisions without any protection or recourse when they go wrong,” says Anthony Morrow, chief executive of OpenMoney. “It needs to be made much clearer that investors using these platforms are really on their own.”

So what does this mean for investors of Woodford funds? 

The suspension will be reviewed after 28 days, and it’s likely that it will be extended. “Some of the positions the fund holds in unquoted stocks are very large and they are not going to be easy to sell quickly,” says Ryan Hughes from AJ Bell. “Investors will have to be patient. While this will be frustrating, the actions are being taken with their best interests in mind.”

Of course, if the suspension is lifted, this could lead to a further run on the fund – although Morrow says Woodford’s team are likely to be working to manage large client relationships to limit this as much as possible.

We might expect outflows from the Income Focus fund, though Hughes says that it doesn’t have a high proportion of illiquid assets, focusing instead on large cap dividend-paying companies. And while the Patient Capital Trust’s share price was down 10 per cent yesterday, he warns that investors should avoid knee-jerk reactions.

Woodford’s fall from grace serves as a reminder that investors should buy a fund because they strongly believe in the strategy, rather than being blinded by the manager’s star status.

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.