Woodford Confronts Career Crisis After Freezing Fund Withdrawals

(Bloomberg) -- Neil Woodford, a Warren Buffett devotee whose winning streak made him a celebrity U.K. money manager, is facing the biggest crisis of his career after freezing redemptions from his flagship fund.

The radical step by the 59-year-old manager could further undermine investor confidence and piles pressure on his firm after assets tumbled in the LF Woodford Equity Income Fund. For many investors, the freeze is a reminder of the turmoil that followed the 2008 financial crisis, when some managers resorted to such extreme measures to safeguard holdings.

The move reverberated across markets, sending shares of Hargreaves Lansdown Plc, a U.K. investment platform, down by as much as 4.7% amid concern of an investor backlash. Hargreaves removed the main Woodford fund, and another that his firm oversees, from its Wealth 50 list of favorites. The Woodford Patient Capital Trust Plc, a closed-end listed fund, plunged as much as 20%, the most on record.

Woodford Confronts Career Crisis After Freezing Fund Withdrawals

The latest events are a dramatic turn for Woodford, who built his reputation into a cult following by calling major swings in technology, tobacco and other stocks over decades at Invesco Perpetual, and once managed the U.K.’s largest equity fund. He launched his own vehicle in 2014 and got it off to a strong start before stumbling.

A spate of recent losses sent many investors rushing for the exit, triggering the decision to halt withdrawals. The move came after Kent County Council, a longtime backer of Woodford, asked for the return of about 250 million pounds ($317 million). It’s not clear if the local government authority managed to get any of its money back.

Woodford’s flagship fund fell 18% in the past year and has declined at an annual pace of 6% over the past three years, putting his firm near the bottom of its peer group. The fund is down 7% year-to-date, while the FTSE All-Share Index has advanced. Woodford incurred losses in recent years on picks such as biotech developer Prothena Corp., online estate agent Purplebricks Group Plc and lender Provident Financial Plc, according to figures through March posted on his firm’s website.

Woodford Confronts Career Crisis After Freezing Fund Withdrawals

The main fund’s assets shrank by 560 million pounds in May through a combination of investor withdrawals and poor performance. The fund manages about 3.8 billion pounds, according to Morningstar data.

The decision to freeze withdrawals gives Woodford time to reposition illiquid holdings, the company said in a statement late Monday. While investments in unlisted securities are unusual for a mutual fund, Woodford hasn’t shied away from them. Two of the top 10 holdings in Woodford’s main fund, accounting for about 7% of assets, were in private companies.

A significant drop in size could undermine Woodford’s ability to run the fund effectively, Hargreaves Lansdown said in a statement explaining its decision to remove that fund and the Income Focus Fund from its list.

Freezing withdrawals "is a difficult to decision to make," said Emma Wall, Hargreaves’s head of investment. "It’s disturbing for investors. Any negative news like this is worrying. But it gives him the breathing space to get on being an investor rather than constantly worrying about redemptions. He can use these 28 days to offload illiquid assets, which he’s doing anyway.”

The halt on redemptions and purchases took immediate effect and will remain until further notice, according to Woodford’s website. The firm promised to keep investors informed about the likely duration of the suspension. A spokesman for the company declined to comment further.

The Financial Conduct Authority said it was aware of the situation and was in contact with the firms involved.

"The decision to suspend was made by the fund’s authorized corporate director, in conjunction with the depositary, and is to allow an important orderly process of asset sales to happen," an FCA spokesman said.

Oracle of Oxford

Woodford’s track record and devotion to Warren Buffett’s long-term investing principles prompted some to dub him the Oracle of Oxford.

In around 26 years at Invesco Perpetual, Woodford developed a reputation for correctly calling major swings across stocks. He helped build the firm’s assets up to about 33 billion pounds over two decades. Invesco shares slumped by 7% on the day he announced his departure to set up on his own in 2013.

The money followed him. St James’s Place, a FTSE 100 wealth manager, took 3.7 billion pounds of its clients’ assets out of Invesco and parked it with Woodford before he’d even turned the lights on. In Woodford’s first full year on his own, his flagship fund returned 16%, beating all 50 of its peers tracked by Bloomberg.

His contrarian views in recent years, such as a bullish stance on Brexit’s impact on the British economy, have helped keep his venture in the spotlight. But with the world fixated on low fees and shifting to index investing, his fund’s losing streak is giving clients a reason to bail. Morningstar has downgraded Woodford Equity Income fund from bronze to neutral, its second-lowest rating, citing underperformance and “persistent redemptions.”

The fund’s bets on unlisted companies, which are harder to sell than listed securities, can complicate its ability to field such requests. Woodford last month told investors he would cut its exposure to unlisted companies to less than 10% this year, and eventually to zero.

A cycle of losses and redemptions can create an opening for short sellers to target stocks in a fund manager’s portfolio -- driving them down further, prompting additional withdrawals and forcing more sales, said Richard Philbin, chief investment officer of Wellian Investment Solutions. But freezing redemptions is also bad news for the U.K.’s active management industry, where years of subpar performance has already eroded trust.

“The investment profession needs names, and in reality there are very few known to the broad public,” Philbin said. “It doesn’t do the profession any good to see someone of his stature do so poorly.”

©2019 Bloomberg L.P.

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