For two decades, Neil Woodford was the only investment manager that the average UK saver might recognise by name. He had a reputation for brilliant, counter-intuitive investment. Then, two months ago, his fame turned to notoriety as he froze withdrawals from his flagship Equity Income Fund, locking in billions of other people’s money, and he and his customers learned a sharp lesson in the dangers of betting on Brexit.
The offices of Woodford Investment Management are not in Mayfair but on a business park on the edges of Oxford. Burly and shaven-headed, Woodford prefers jumpers and jeans to suits. He scrapped staff bonuses in 2016. But while he is in many ways non-traditional, Woodford’s business still trades on the central tenet of investment management: that some people are extraordinarily good at picking stocks.
Woodford’s reputation as a financial wizard was minted in the dot-com crash. Between 1997 and 2000, more than 500 internet-related companies floated on stock markets. Some were valued at more than 100 times their expected earnings. Many fund managers saw this profusion of fast-growth stocks as a bonanza, but Woodford – a former student of agricultural economics at Exeter University – bet on tobacco, a business rooted firmly in the last century. His caution paid off. By November 2000, more than $1.7trn had been wiped off the value of internet companies in the Bloomberg US Internet Index, and the contagion had spread to other stocks. Woodford’s Invesco Perpetual funds provided solid returns amid the chaos.
Pragmatic, long-term strategy was his selling point for three decades. Like Warren Buffett, he is a value investor, buying stocks he believes are underpriced and holding them for an average of 15 years. One of his favourite books is Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, which describes historical investment bubbles such as the South Sea Company in the 16th century and the “Tulipomania” of 17th-century Holland.
In 2005 and 2006, as banks enjoyed the credit boom, other funds bought heavily into financial services and securities backed by mortgages. In the US, a handful of fund managers saw the bubble for what it was, and profited hugely by taking short positions on (or betting against) the housing market. Rather than follow the crowd into the bubble that the banks were inflating, Woodford invested in “defensive” stocks, such as pharmaceuticals and utilities, which would be least affected by the rest of the market. By the time Woodford left Invesco Perpetual in 2014, he had turned every £10,000 invested when he started into more than £232,000.
It is understandable, then, that as Brexit became more unpredictable, investors flocked to the funds of someone with a reputation for making the right calls in a crisis. Many came to Woodford on the recommendation of Hargreaves Lansdown, the largest “investment supermarket” in Britain. By this year, more than 130,000 retail customers had invested over £1.1bn in Woodford’s Equity Income Fund through Hargreaves Lansdown. These were not the ultra-rich but regular savers, putting in an average of less than £10,000 each.
The co-founder of Hargreaves Lansdown, Peter Hargreaves, was one of the Leave campaign’s biggest backers, donating £3.2m. For both Hargreaves and Woodford, Brexit scaremongering is a bluff. Leaving the EU would not damage the British economy as others predicted. Following his trademark strategy of betting long on unpopular stocks, Woodford invested in firms that others saw as vulnerable or unpromising, but which he considered undervalued. These included the outsourcing giants Kier and Capita, the energy broker Utilitywise, the online estate agent Purplebricks and the AA.
But Brexit is not like the dot-com crash and the credit bubble: it is a far larger social and political phenomenon, systemic in nature and chaotic in its outcomes. Even now, for all the promises of Boris Johnson, it is it not known exactly when or to what extent it will happen. It is not just a different bet, but an entirely different game.
As the Brexit process dragged on, Woodford’s bets began to appear increasingly less well informed. Shares in Kier fell more than 85 per cent in the last year, and in June the company announced plans to cut 1,200 jobs. Utilitywise went into administration in February; the share price of Purplebricks is at time of writing less than a quarter of its peak two years ago; the AA has a third as many members as it had in 1998 as increasing numbers of young people decide against learning to drive. Between May 2017 and May 2019, investors withdrew £4.3bn from the fund.
The decline became a crisis at the end of May, when Kent County Council’s pension fund requested to withdraw its entire £263m stake from Woodford’s embattled fund. What’s more, large chunks of the fund were invested in hard-to-sell stocks in tech companies that might not realise their value for many years. Further exodus from the fund would have forced Woodford to begin selling these assets at their current low value, rather than their hoped-for future price. To avoid this, on 3 June – the day that Kent council’s quarter-billion was due to be redeemed – Woodford “gated” the Equity Income fund, suspending all investments and withdrawals. Weddings and holidays were put on hold, retirement pots dwindled. The anger became rage as it emerged that Woodford’s company continued to charge fees on its funds, making an estimated £100,000 a day. On 27 July Woodford revealed that he had sold more than half his shares in his publicly listed investment fund, Woodford Patient Capital Trust, “to meet personal financial obligations”.
And yet, in line with the no-dealers now in power, Woodford insists that he is on to a winner. He continues to predict a “spectacular” return in performance for the Equity Income fund in a couple of years, arguing that long-term value investments inevitably look bad at times.
Not unlike Woodford’s customers, the country itself is now locked into a decision made by extremely rich, powerful men. They have created a crisis and persuaded ordinary people they have the smarts to handle it better than anyone else. We are reduced to hoping that they are right.