Woodford to Shut Firm as Manager’s Ouster Caps Stunning Fall
(Bloomberg) -- Neil Woodford’s ouster from the fund bearing his name marks the conclusion of a stunning fall from grace that counts as one of the most dramatic in London’s financial history.
Managers are rarely fired from funds they are synonymous with. The closest parallel in recent memory is Bill Gross’s 2014 departure from Pacific Investment Management Co. after an acrimonious dispute over his management of the company he co-founded. But the unraveling of Woodford is different because it stemmed from a crisis that’s taboo in fund circles: A liquidity crunch.
By the end of the day, Woodford had bowed out and said he plans to close his investment firm: Woodford Investment Management.
“We have taken the highly painful decision to close Woodford Investment Management,” Woodford said in an emailed statement on Tuesday. “I personally deeply regret the impact events have had on individuals who placed their faith in Woodford Investment Management and invested in our funds,” he said.
The firm will fulfill its management responsibilities to the listed Woodford Patient Capital Trust Plc and to the LF Woodford Income Focus Fund before closing, he said.
Woodford’s ouster from his flagship fund caps the most difficult chapter in a career spanning more than three decades. A fund manager at Invesco Ltd. for a quarter century, he made his reputation by sitting out the dot-com bubble at the turn of the millennium and selling down bank shares in the run-up to the financial crisis, before setting out on his own in 2014. But bets on smaller and even unlisted companies at his new firm eventually were his undoing, leaving him unable to pay back investors who wanted out.
Earlier in the day, the administrator of his main investment vehicle fired Woodford as the fund’s manager and said the LF Woodford Equity Income Fund will be liquidated. Woodford objected, saying the decision wasn’t in the interests of long-term investors. While he still owns the firm he co-founded, being kicked out from his biggest fund removes his main source of income.
“This creates further uncertainty for a larger number of customers and the key now is that they are given information about what is going to happen to their investments as soon as possible,” said Ryan Hughes, head of active portfolios at AJ Bell Plc.
In the world of mutual funds, the failure to meet redemptions is akin to a breach of trust, and it’s rare that funds or their managers rebound from a freeze. Swiss money manager GAM Holding AG last year froze funds tied to Tim Haywood after the former star bond manager was suspended and it was unable to meet ensuing redemption requests. Haywood was eventually ousted and the firm had to liquidate its second-biggest strategy with billions of dollars in assets.
In 2016, famed U.S. investor Robert Goldfarb retired from the firm he co-founded -- Ruane, Cunniff & Goldfarb -- after a concentrated bet on a troubled drugmaker marred the reputation of a mutual fund that traces its roots to billionaire Warren Buffett. But that investment vehicle, the Sequoia Fund, was able exit the troubled holding without having to suspend redemptions, and performance rebounded in recent years.
At Pimco, it took about two years to reverse outflows in the wake of Gross’s departure, underscoring just how closely linked the firm was with its co-founder. But unlike Woodford’s ouster from his main fund, the exit of Gross largely wasn’t related to investment decisions, and the firm didn’t have to freeze its funds. Gross struggled to start a new career after joining a rival firm and retired this year.
At Woodford’s firm, the damage is that much more severe because the firm is built entirely on his investing acumen. The son of a postcard printer, he stumbled into fund management after completing a degree in agricultural economics. His first role running money was at Eagle Star Insurance Group in 1987 before moving to Invesco the following year, where he would make his reputation with contrarian bets.
He kept dot-com stocks out of his portfolio at the turn of the millennium, and before the financial crisis in 2008 he began building stakes in defensive stocks like British American Tobacco Plc and GlaxoSmithKline Plc, while eschewing banks. Despite rocky periods -- he declined to buy back those bank stocks before the post-crisis rally, for example -- Woodford maintained an imperious reputation, particularly among retail investors.
As his stature in the U.K.’s business community grew, so did his influence. In 2012 he publicly criticized the proposed merger of aerospace giant BAE Systems Plc and French rival Airbus SE (then known as EADS), helping to torpedo the deal.
In 2013, Woodford announced he would leave Invesco to set up Woodford Investment Management Ltd. He oversaw about 33 billion pounds in assets at the time of his departure, and big chunks of that followed him out the door. St James’s Place Plc, the U.K.’s biggest wealth manager, removed 3.7 billion pounds from Invesco and pledged it to Woodford’s firm even before it was started.
The move endowed Woodford with more freedom and allowed him to invest in smaller, less-liquid and even unlisted stocks. It was these investments that would eventually lead to the suspension of redemptions from the fund, as Woodford found himself unable to sell those holdings quickly enough to return money to clients.
Though he made his name in blue-chip stocks at Invesco, unshackled by the strictures of corporate bosses he indulged his venture capitalist instincts in the biotech, life-science and health-technology industries particularly.
“I strongly believe that investing in early-stage technology businesses can add meaningfully to the long-term performance of the fund,” Woodford wrote in a blog post shortly before opening his Income Fund. There was a lack of investment in early stage companies and patient capital, long term money willing to wait for a company “to blossom”, he wrote.
Usually, money managers who want to invest in unlisted companies use fund structures where investor money is locked up for long periods. Woodford’s equity income fund is a more traditional mutual fund, but it’s allowed to have up to 10% of its holdings in unlisted stocks, according to European rules.
After an impressive 16% return in 2015, the fund’s performance dropped below peers, leading many investors to pull money. As they cashed out, Woodford was forced to sell more liquid holdings, leaving remaining clients with harder-to-sell assets. When a pension fund for the council workers of an English county asked for its roughly 260 million-pound investment back, Woodford had little choice but to halt redemptions to prevent a firesale.
A redemption freeze is designed to allow for an orderly sale of assets, but for investors and supporters it was the last straw. Hargreaves Lansdown, the U.K.’s largest listed fund broker and a long time backer of Woodford, removed his funds from a list of favorites. The mandate from St. James’s Place that had followed Woodford out the door from Invesco was also pulled.
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