ADVERTISEMENT

Woodford Internet Nemesis Claims Vindication

Woodford Internet Nemesis Claims Vindication

(Bloomberg) -- It began two years ago as a skirmish made for the social-media age: a renegade blogger badgering a pillar of the establishment who had made his name over decades of investing other people’s money.

In this week’s stunning conclusion, it turned out the heckler was right: celebrity U.K. money manager Neil Woodford froze redemptions from his flagship fund to prevent its collapse, had some of his biggest clients walk away and faced widespread criticism. 

To the critic, Tom Winnifrith, who edits Shareprophets.com, the latest developments reflected nothing less than classic comeuppance. "When you open a newspaper and every single one of them still refers to you as the fund manager who is known as Britain’s Buffett, it’s easy to believe you actually are," said the 51-year-old. "You can believe your own publicity."

Whether Woodford believed the headlines, analysts note that he ignored fundamentals of tradecraft by permitting his investors to pull money from his main fund at will, though his portfolio comprised an array of hard-to-sell assets. The problem became obvious as withdrawals accelerated amid a string of recent losses: he lacked the cash to meet the demand. So he announced Monday he was slamming the door shut; he explained in a YouTube video he needed to avoid a fire sale to protect  other investors.

"Allowing for illiquid or unlisted securities in a mutual fund with a daily redemptions frequency is the best way to create gigantic assets and liability mismatch leading to this type of unfortunate event," said Nicolas Roth, head of alternative assets at Geneva-based Reyl & Cie.

As Woodford promised a shift into more readily traded investments, the pressure mounted across several fronts in recent days. Regulators have renewed their scrutiny of his entire firm, with about 8.6 billion pounds ($11 billion). Politicians such as Nicky Morgan called on Woodford to waive fees to appease investors who are stuck in his fund. And critics questioned the independence of the board of his London-listed 1 billion-pound Woodford Patient Capital Trust.

Of the five current directors, four have worked or work for companies in which Woodford is either a significant current investor or has been in the past. Susan Searle, the chairwoman of the investment trust, is the former chief executive officer of Touchstone Innovations Plc, a venture capital company in which Woodford invested more than a decade ago. Steven Harris, the chairman of the trust’s audit committee, is boss of Circassia Pharmaceuticals Plc, another Woodford holding. 

“It is reasonable to ask as to whether there was sufficient challenge and hence governance failures throughout the business,” said Robert Talbut, the former chief investment officer of Royal London Asset Management and the current director of several investment funds.

In a statement to Bloomberg, Woodford Investment Management defended the board’s independence.  “The Board does not control the investment decisions of the manager and hence it is possible that the manager acquires shares in a company in which a director of WPCT also sits on the board or holds shares," the statement said. “Where this occurs, WPCT has strict controls in place such that the individual director is not present in relation to any discussion around the stock involved."

The current debacle would have been unimaginable to most when Winnifrith appeared to start trolling Woodford. Back in 2017, he wrote “Neil Woodford - how long before The Deadwood Press admits that he does not walk on water?"

Winnifrith, an analyst and a writer for three decades, says the red flags included the move toward unlisted companies and small caps, as well as potential conflicts of interest. He himself was a fund manager once and says he didn’t cover himself in glory. 

Meanwhile, in a quarter-century at Invesco, Woodford gained a reputation for prescience by correctly calling major swings in technology, tobacco and other stocks. When he left Invesco to co-found Woodford Investment Management in 2014 he took 3.7 billion pounds with him—far more than Bill Gross was able to raise after he left Pimco for Janus that year.

Woodford Internet Nemesis Claims Vindication

He continued to attract cash into 2017, when the LF Woodford Equity Income Fund’s assets peaked at more than 10 billion pounds. But that’s when losses and withdrawals began to take their toll, after a slew of bad news for key holdings such as pharmaceutical giant AstraZeneca Plc, sub-prime lender Provident Financial Plc and Capita Plc, an outsourcing firm.

His performance over three years, a key industry metric, now ranks in the bottom 25% among peers, according to data compiled by Bloomberg. 

Along that time, his investment strategy grew increasingly idiosyncratic, moving away from large-cap dividend paying equities. Micro-cap and small-cap stocks accounted for almost three-quarters of the equity-income fund as of April, according to Morningstar. Such stocks typically are not widely covered by analysts, adding a further strain on Woodford’s nine-member investment team.

As investors were yanking their money this year, regulations were starting to bite. Mutual funds are allowed at most 10 percent of their assets in unquoted securities, just the type of investments Woodford had been championing for years as a way to beat the market. By early May, Woodford's investments in a few of the companies were listed on the International Stock Exchange in Guernsey. That listing process helped ensure the fund was below the 10 percent ceiling. The Financial Conduct Authority is now examining the Guernsey listings and is in discussions with Link Fund Solutions, a third-party overseer of the fund.

After years of hurling insults over the Internet, Winnifrith finally had his chance for a face-to-face confrontation last month. He bought eight shares, costing him 10 pounds, to gain entry to the annual meeting of the listed fund managed by Woodford. At Wolfson College at Oxford University, attended by about 45 people in all and many of them board members and employees, Winnifrith challenged Woodford on issues ranging from outflows to his fund holdings.

”He got quite angry on a number of matters,” Winnifrith said. “In one outburst he said redemptions were largely driven by false media stories panicking investors and he singled me out by name as a particular offender.” A spokesman for Woodford declined to comment on Winnifrith.
 

--With assistance from David Hellier and Silla Brush.

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

©2019 Bloomberg L.P.