Neil Woodford believed himself the British answer to Warren Buffett. That ego helped the fund manager become one of the best-known stock pickers in the country, but it also caused his spectacular fall in 2019. A new book shows how changes in the UK pension scheme, combined with weak regulation, they left British savers exposed.
Built on a Lie: The Rise and Fall of Neil Woodford and the Fate of Middle England’s Money (Built on a lie: the rise of Neil Woodford and the fate of English middle class money) by Owen Walker traces the asset manager’s rise from relatively humble beginnings in a suburban London town. It owes its fame to two great bets. In the internet boom of the late 1990s, he avoided tech because he didn’t understand their stratospheric valuations. When the bubble burst, his High Income fund outperformed. Years later, he made a similar call to avoid bank stocks, before the financial crisis.
These successes made investors trust him with their money. The fees allowed him to embrace a lavish lifestyle, buying a mansion that was once owned by Formula 1 mogul Flavio Briatore. It also encouraged him to leave Invesco Perpetual, one of Britain’s best-known investment houses, and start his own company.
Investors who followed him avidly knew little about the risks he was taking with their money. This vulnerability was the result of radical changes in the British pension market. Walker, journalist for the FT, explains how the closure of company pension plans based on final salary forced savers to manage their own pensions. Faced with thousands of products, they relied on financial advisers, many of whom were loyal to Woodford, as well as the “best buy” lists of groups like Hargreaves Lansdown. The £ 7bn wealth manager supported Woodford to the end.
Woodford Investment Management’s strategy, which at its peak was overseeing £ 18bn, was to invest in riskier unlisted companies, along with large holdings in dividend-paying top-tier companies such as Imperial Brands. But seemingly strong firms like Provident Financial, the home-based lender that was once on the FTSE 100, disappointed. By the time Woodford’s Equity Income fund was discontinued in 2019, only 19 of the 72 companies it owned three years earlier were showing positive returns.
The lack of liquidity of Woodford’s funds hastened its demise. When the Kent County Council, one of his loyal customers, withdrew his £ 263 million investment, Woodford had no cash to meet the demand. While savers believed they had instant access to their money, their unlisted holdings were difficult to sell, and their listed positions had grown so large that they could not be liquidated without further plunging 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 at a parliamentary appearance about the implosion, he explained that the problem could be systemic for much of the asset management industry.
Walker believes that regulators share some of the blame. The Financial Conduct Authority cleared Woodford’s new venture in record time, despite the fact that it faced an open investigation into its Invesco operations. The regulator also allowed it to use outsourcing firm Capita Asset Services as a kind of external regulator, or Authorized Corporate Director, despite the fact that the manager was also the largest shareholder in the provider’s parent company.
Internal checks and balances also failed. Woodford planned to invest $ 250 million in US bioscience firm Evofem, even though he had only met twice in London with a company executive. When Equity Income was about to exceed the limit of 10% of assets invested in unlisted, it put pressure on some of those companies to issue their shares on the opaque Guernsey Stock Exchange.
Woodford’s disappearance is also another nail in the coffin of active management. The growth of cheap index funds has put pressure on active managers to show that they can add value. His successful counter bets seemed to justify higher commissions. But his clients would have fared much better if they had entrusted their pension funds to an indexed product.
Walker juxtaposes the lifestyle of managers with the pensioners whose money they manage. Woodford spent nearly £ 14 billion on a 400-hectare retreat in the Cotswolds and tested a Ferrari on the manufacturer’s private track. Meanwhile, the owner of a bed and breakfast The 67-year-old lost part of her savings and has to continue working.
But Woodford doesn’t seem to think there is no remedy. In February it revealed its plans to launch a new fund in Jersey, managing only institutional money. But with the results of an FCA review of its rulings still unpublished, it seems unlikely that it will return to the fray. The best he can hope for is that investors and regulators will learn the lessons from his failures.
The authors are columnists for Reuters Breakingviews. Opinions are yours. The translation, of Carlos Gomez Down, it is the responsibility of Five days