Neil Woodford – update

Before we start let me make this clear. I like Neil Woodford. I admire his track record and his conviction. I also hate investing in funds because they can be quite opaque. I don’t invest in Woodford Funds, but I still believe Neil is very good at choosing more winners than losers and left to his own devices both he and his customers would undoubtedly prosper. But that hasn’t happened as I’m sure you have heard by now.

What happened?

Neil Woodford has just pulled up the draw-bridge, locking investors in. He isn’t the first and he won’t be the last to temporarily withhold withdrawals and redemptions from a fund to protect those investors who wish to stay. However he should never have put any of his investors in the position where a suspension became necessary, after all, most shares are tradable every single day. Currently he just can’t sell the fund’s smaller, unlisted shareholdings quickly enough, to meet the requirement of the money flooding out, without reducing the returns of those investors who wish to stay invested in the fund. In my career I have had to deal with both “With (Un)Profits funds” and “Commercial Property funds” suspending or limiting redemptions from time to time. This last resort is never appreciated by those who need their life savings back. It’s the reason I don’t invest any of my savings nor my clients savings into those types of funds anymore.

Is there any risk I couldn’t get my savings back immediately from you?

No.

For £77m of the £82m that we manage not a penny of that amount is held in any funds. So there is no fund manager who could lock the door to withdrawals. Across all of our clients, if an account is large enough to be split up into 40 or so individual parts, it is invested 100% in a combination of exchange listed liquid shares and cash. We would always have access to our savings.

As for the balance of £5m, made up of the amount invested in smaller accounts and onshore insurance bonds, funds need to be used. The chances of a single fund running into difficulty is extremely slim but can occur as evidenced by The Woodford Equity Income fund. Fund suspensions can sometimes also occur across multiple funds in the same sector. For example, just after the Brexit vote in 2016, many UK Commercial Property funds were suspended simultaneously. At that time we had seen the possibility of fund suspensions happening so had already sold all our property funds. We had learned to do that after we successfully sold down all of our property funds in 2007, shortly before there was a lock in last time. Lock-ins don’t last forever but the bitter memory lives on.

For those small number of clients who are invested within funds, their portfolio comprises of a mix of 4 or 5 funds. If any single fund was temporarily suspended, there would still be 3 or 4 funds left open, plus the cash element to provide sufficient short term withdrawals. The selection of funds is made up across a variety of sectors and a variety of managers to further minimise risk. I am hopeful that we should be able to invest all small accounts directly into shares shortly as the minimum amount we can trade falls from £500 to £100. (watch this space)

Why did the Woodford Equity Income fund need to be suspended?

The chart below shows why investors want their money back, their patience has finally run out after 5 years with nothing to show for their faith in Neil’s ability.

You need a trigger to start a stampede

The following chart show’s our Moderate Portfolio performance versus the returns from The Woodford Equity Income Fund. Any of our clients can sell their portfolio at any time and leave, thankfully they have no reason to form a queue. Our returns were achieved over the exact same period and turbulent political and economic events. I couldn’t have done the same managing £15 billion unfortunately.

So what’s the real story of Neil’s downfall in your opinion?

I believe there were unseen forces that caused Neil’s dramatic underperformance. We have continued to capture more than our fair share of market returns. Why? It certainly isn’t that I have more investment experience than Neil. More ability than Neil. That little H.J.Scott & Co. has more resources than Woodford Investment Management Ltd. We have not been just lucky. That Neil and his hugely experienced team have been terribly unlucky. That we invest more globally than Neil. That I personally disagree with much that Neil says. No, that is not the story. The true story is simply David versus Goliath (where the little fellow won), or the more up to date version the UK versus the remaining Twenty Seven. (where the little fellow looks beaten).

Preserving the status quo

It is vastly profitable to large investment companies to control “other peoples money”. Your savings and my savings. Don’t believe me? Then take a walk around the Square Mile and check out the names on the fabulous buildings. It’s a business that they don’t want to lose. Neil Woodford going it alone is a challenge to their business model. If he succeeds, it could be just the tip of the iceberg with other talented investment managers leaving too, taking £Billions with them. It was important to the big boys that he was seen to fail, or rather to not succeed without a fight. Here’s what I think has been going on since 2014.

The rules of the game

Every fund manager has to disclose the top ten holdings in a fund. A quick look at any fund factsheet brings up the usual names. For any equity income fund it would contain the usual suspects. HSBC, Vodafone, Shell etc. Neil went one step further. He disclosed every single share that he invested in. Large and small. If he bought a share he told everyone. DIY investors who followed his purchases bought too. After all, he had done the research and he had that peerless reputation. Why not jump aboard and have a free ride? With all that additional DIY buying, the price of those shares obviously went up! Just by buying a share, ensured that his followers would then drive up that shares price. It was perfect right up until it stopped working.

Neil also held a quantity of shares that are not listed currently, but would come to the stock market in the future. Nobody could follow him into these trades as the companies couldn’t be bought. These were his long shots. Theoretically the cherries on the top.

Incredibly one by one, the larger liquid shares that he held, started to reverse momentum. They started to fall. This led to more sales and more share price falls. I noticed a while ago that if Neil was invested in a share it became almost “the kiss of death” for that company’s shares.

Where are my shorts?

Neil’s picks started to become the shares that were most “shorted”. When we buy shares we go “long”. Or rather we would like to keep them a long time. For years. It’s a nice hope, but company fortunes wax and wane and eventually we replace most of them with other shares that we wish to once again own forever. I call that sound long-term investment. But that’s not exclusively how the market works. Rather than buy and hold a share you can just gamble on its future price. Higher or Lower. You don’t have to lay out much capital, you don’t buy the shares, you simply place bets. The level of those bets can be observed. What percentage of bets are guessing a share price will rise, versus the percentage of bets for a share price falling.

You would be foolish to go long on a share when there was a huge weight of money betting that it was likely to fall in price. The DIY investors took notice and backed off without buying. If anyone else (like us) owned that company share they too thought “time to sell”, which in turn brought down the price. We sold our holdings in Purplebricks once I had figured out just what was happening.

Share by share good companies’ share prices went bad. To be fair, like the rest of us, he also bought some companies where surprisingly bad news also came to light after his purchase. Investors left, he sold what was profitable, then he was forced to sell shares that were in a loss situation and gradually he ended up where he could make no more sales and had to pause any future investors heading for the exit. A reputation built over a lifetime destroyed in just a couple of years.

The twist

I have blogged about Neil a few times is the past. One of those blogs discussed my purchase and later sale of the Edinburgh Investment Trust. I chose to buy just after the value had plummeted by 11% in the day following the announcement that Neil was to leave and cease to manage the Trust. We made a bit of money because of the over-reaction and then sold. So how did Neil’s replacement fair? I will let you be the judge of that.

I wasn’t keen on my little dalliance with an Investment Trust back in 2014/15. Time hasn’t made me more enthusiastic.

Already Hargreaves Lansdown and St. James Place have been implicated. They look like they will suffer collateral damage and deservedly so, for their outright defence of under-performance of their customers’ savings. The real players that caused the “run on the bank of Neil Woodford” remain in the shadows, content with their work to maintain the status quo. I think it has been a pyrrhic victory for the fund industry, which has exposed the opaque workings of The City. Expect this story to run on and on throughout the summer. Unless Donald Trump declares war on somebody, there’s another Royal pregnancy, we have a heatwave or we leave the EU.

Previous Blogs that mentioned Neil Woodford

Simply type Neil Woodford into the search field above and all the mentions will be revealed.