Woodford Fights History for Survival as His Fund Empire Implodes

(Bloomberg) -- Neil Woodford might survive the crisis gripping his fund-management empire. History isn’t on his side, though.

The shock announcement Monday by the former star manager’s Woodford Investment Management Ltd. that it was blocking withdrawals from its flagship fund is almost without precedent. Only a handful of funds have taken that step in recent decades, and no substantial equity vehicle has done so.

“Will he make it out of this? Who knows -- but I do feel the cards are stacked against him," said Richard Philbin, chief investment officer of Wellian Investment Solutions, which helps clients allocate about 1.7 billion pounds ($2.2 billion). “How it all gets unwound is the key."

Woodford’s peers didn’t fare well in similar circumstances. The late Marty Whitman’s New York-based credit firm, Third Avenue Management, decided to liquidate a fund after roiling markets with a move to freeze redemptions in 2015. GAM Holding AG’s suspension of its bond manager Tim Haywood sparked a crisis that triggered outflows last year, forcing the Swiss money manager to block funds and liquidate some of his money pools.

The U.S., the largest market for mutual funds, has permitted only six of them to suspend redemptions since 1972, according to the Investment Company Institute, an industry association. For a retail equity vehicle to resort to that step is unheard of, raising questions whether Woodford can survive the shockwaves.

Woodford’s wounds were largely self-inflicted, contrasting with firms that fell victim to broad macro events such as U.S.-based Reserve Management Corp., which delayed redemptions from a cash pool during the financial crisis, or Credit Suisse Group AG and Nomura Holdings Inc., which liquidated investment products that made bets against market volatility in February 2018. Closer to home, several U.K. property funds stopped client withdrawals after the Brexit vote in 2016, halting growth in the sector.

Woodford stands out because of positions in illiquid investments that worked as long as other parts of his portfolios performed well and attracted cash. His flagship LF Woodford Equity Income Fund has made hardly any money since its launch in 2014. It dropped 7% this year through May 31 and is down 18% in the past 12 months.

“The suspension of dealing is almost unprecedented in standard equity funds," said Peter Brunt, an analyst at Morningstar. The move “will have undoubtedly, and understandably, resulted in a significant loss of trust in the manager. As a result, we would expect further redemptions upon the reopening of the fund."

Within days of the freeze, Woodford’s biggest backer asked for its money back, analysts and the U.K.’s largest fund platform downgraded his products, while loyal clients and critics formed a chorus of dismay on social media.

St. James’s Place Plc, one of Woodford’s first clients when he set up his own firm in 2014 after 26 years as a renowned Invesco Perpetual manager, abandoned its relationship on Wednesday. The company pulled 3.4 billion pounds, or about 40% of Woodford’s firm-wide assets. Hargreaves Lansdown Plc, which for years had Woodford on its preferred list -- used by investors as a guide to capital allocation -- dropped its recommendation. Morningstar downgraded the manager’s main fund to negative, saying the strategy is “structurally impaired.”

Investors are now turning their backs on a Woodford-managed publicly traded fund that has a majority of its assets in unlisted securities. The Woodford Patient Capital Trust was quoted at a record discount to net asset value on Tuesday, a sign of waning faith in the manager’s investment decision-making, while BlackRock Inc. sold more than 24 million shares to bring its exposure to the lowest-ever level, according to a filing Wednesday.

Woodford’s fans, mostly individuals who entrusted their life savings to his firm, questioned his record on Twitter. “We are worried sick. We can’t afford to lose anything," said one. Detractors, on the other hand, enjoyed a told-you-so moment.

“Woodford is a legend in the City and may yet survive this," said Alan Shala, head of corporate acquisitions at M&A boutique Chelsea Corporate. But the “good days are most probably over."

--With assistance from John Gittelsohn and Suzy Waite.

To contact the reporter on this story: Nishant Kumar in London at nkumar173@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Paul Sillitoe, Sree Vidya Bhaktavatsalam

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