When Neil Woodford’s fund management group collapsed in October 2019, it sent shock waves through the investment world. But it barely registered with the wider British public. This was perhaps because most of the 400,000 victims were well-heeled and perhaps also because the questions the scandal raised – about whether the UK’s system for managing people’s pensions and savings is fit for purpose – seemed to pale into insignificance compared to Brexit and other issues.
Both When the Fund Stops by the Financial News correspondent David Ricketts and Built on a Lie by Financial Times journalist Owen Walker thoroughly explore Woodford’s rise and fall. They tackle the wider issues surrounding the collapse of his business and how regulators, as is their wont, missed the red flags. They also highlight the urgent need for reform.
Ricketts’s account is the more vivid and affecting account, providing greater insights into ‘Woody’ Woodford’s private life and character. Born in Berkshire in 1960, Woodford was educated at Maidenhead Grammar School, before studying agricultural economics at Exeter University. In 1981 he opted for a career in the City, briefly working at Dominion Insurance and a range of other financial firms before joining the Henley-based investment company Perpetual as a junior fund manager at the age of twenty-eight.
Walker is better on the economic forces that shaped Woodford’s career: how the Big Bang transformed the City of London, normalising a ‘greed is good’ mind-set; how Nigel Lawson’s introduction of tax-efficient wrappers called PEPs fuelled the growth of the investment market; how flawed incentives made it possible for fund managers such as Woodford to make fortunes, even as clients were impoverished; how financial regulators often turned a blind eye when customers were fleeced. ‘This “heads I win, tails you lose” model is embedded in the industry,’ writes Walker.
On occasions during his twenty-five-year career at Perpetual, Woodford showed some real investment prowess. This included buying into tobacco companies at a time when other investors were avoiding them, steering clear of technology stocks ahead of the 2000 dotcom crash and dumping shareholdings in banks in the run-up to the 2008 financial crisis. Such counterintuitive actions enabled him to trounce rivals’ funds and he was soon being held up as the best stock-picker of his generation, especially by intermediaries who earned their money by steering customers’ savings into his funds. By the time it was announced that he was leaving Invesco Perpetual, as the company had become following its takeover by the American investment firm Invesco, to go it alone in October 2013, Woodford was ‘dripping with hubris’, according to Walker, and fuming at attempts by Invesco’s head office in Atlanta to rein in aspects of his investment behaviour.
Within a few months of setting up Woodford Investment Management in a nondescript Oxford business park in May 2014, Woodford had attracted an unprecedented £8.5 billion of investors’ money, including £200 million from Kent County Council’s pension fund, with much of the moneyit transferred across by former clients of Invesco Perpetual. But instead of stock-picking among safer FTSE 350 companies, Woodford started dabbling in the very things Invesco had been trying to stop him doing. He invested in untried technology and biomedical start-ups, which he had convinced himself would one day change the world. By June 2017, assets under his management had soared to £10.2 billion. But cracks were already emerging in Woodford’s new edifice: dissenters were being eased out and a number of the larger companies in which Woodford had invested started to succumb to an extraordinary string of calamities that caused their share prices to collapse. The situation among some of the smaller, illiquid firms in which Woodford had – sometimes gullibly – invested was even worse.
Ricketts depicts the ensuing slow-motion car crash well, suggesting Woodford had become so complacent and arrogant that he hadn’t bothered to kick the tyres of the firms he was investing in properly or evaluate the sectors in which he was considering putting money. Yet the gatekeepers of the investment industry, such as Hargreaves Lansdown, continued to drive money his way, even after they had realised that something was awry, and the financial press continued to praise him to the rooftops. By 2018, the atmosphere inside Woodford’s Oxford office, where he came to work dressed like ‘a menacing nightclub bouncer’, had turned toxic. His loyal sidekick Craig Newman was shouting and swearing at anyone who dared challenge him.
As investors raced for the exits, Woodford risked falling into a classic liquidity trap. He could only pay back departing investors by selling off the crown jewels – the fund’s holdings of ‘liquid’ (easier-to-sell) shares in companies such as AstraZeneca. But this increased the proportion of the fund that was made up of harder-to-sell ‘illiquid’ shares in unquoted firms, many of which had turned to dross. As he came close to breaching the fund’s ‘trash ratio’ (a 10 per cent limit on illiquid stocks set by the EU), Woodford made one of his worst mistakes: he engaged in some dubious financial engineering, including listing his stakes in unquoted companies on the Guernsey stock exchange, in the hope of giving the impression that all was well.
The final act began in June 2019, when trading in Woodford Equity Income, whose assets had by then shrunk from £10.2 billion to £3.7 billion, was suspended by Link Fund Solutions, a Sydney-headquartered group that served as its ‘authorised corporate director’. This effectively barred investors from retrieving their cash. Three weeks later, Bank of England governor Mark Carney told the House of Commons Treasury Committee that ‘these funds are built on a lie’ – the remark that gave rise to the title of Walker’s book. To add insult to injury, even though Woodford’s funds were gated and frozen, over the next four months his company continued to extract £65,000 per day in fees from investors. Angry calls from politicians, regulators and consumer rights activists for Woodford to drop these unfair charges fell on deaf ears. Then came the executioner’s blow. At a meeting in his Gresham Street office in October 2019, Link’s UK boss Karl Midl told Woodford and Newman that the fund was being shut down and liquidated. No ifs, no buts. Woodford’s career appeared to be over. It later emerged that he and Newman had paid themselves a combined £111.5 million, mainly in dividends, over the past five years.
Ricketts names each of his chapters after a different Led Zeppelin song, reflecting Neil Woodford’s passion for the 1970s rock band. The chapter in which he delineates Woodford’s final humiliation is appropriately titled ‘Trampled Under Foot’. In it, Ricketts writes that Woodford’s ‘fund management firm had made him, and a small circle of confidants, very rich. Everyone else who had trusted him had lost money.’ Plus ça change – both on Wall Street and in the City of London.
Clearly Woodford is a man without shame. Even though hundreds of thousands of investors, some of whom lost their life savings, are still waiting for their money back, and even though the Financial Condict Authority has yet to complete its investigation into the affair, the disgraced investor recently sparked outrage by announcing plans for a new investment business called WCM Partners – this time focused on institutional clients. Were the FCA to sanction such a project, it would be a double kick in the teeth for everyone who bought into the Woodford dream. He has already gone some way to launching a new Buckinghamshire and Jersey based asset management business called WCM Partners
This book review was published in Literary Review in April 2021