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Last Trade - 18/05/21

Sector
Financials
Size
Large Cap
Market Cap £8.03bn
Enterprise Value £7.66bn
Revenue £592.5m
Position in Universe 134th / 1824

BREAKINGVIEWS-Review: Fund manager’s fall reveals larger flaws

Fri 12th March, 2021 3:02pm
(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Aimee Donnellan
    LONDON, March 12 (Reuters Breakingviews) - Neil Woodford
fancied himself as Britain’s answer to Warren Buffett. That ego
helped the fund manager become one of the country’s best-known
stock-pickers, but also brought about his spectacular downfall
in 2019. A new book on the saga shows how changes to the UK’s
pension rules, combined with supine regulation, left British
savers exposed.
    “Built on a Lie: The Rise and Fall of Neil Woodford and the
Fate of Middle England’s Money” by Owen Walker charts the asset
manager’s rise from relatively humble origins in a commuter town
outside London. He owed his fame to two big bets. During the
internet boom of the late 1990s, Woodford shunned technology
companies because he failed to understand their stratospheric
valuations. When the bubble burst, his High Income fund
outperformed. Years later, he made a similar astute call to
avoid bank stocks, avoiding losses when they tumbled during the
financial crisis.
    These successes prompted investors to entrust Woodford with
their cash. The resulting fees allowed him to embrace a lavish
lifestyle, buying a seven-bedroom manor house once owned by
Formula 1 tycoon Flavio Briatore. It also emboldened him to
leave Invesco Perpetual, one of Britain’s best-known investment
houses, and set up his own firm.
    The investors who eagerly followed Woodford knew little of
the risks he was taking with their money. This vulnerability was
a result of sweeping changes to Britain’s pension market.
Walker, a journalist at the Financial Times, explains how the
closure of company-supplied final salary retirement schemes
forced savers to manage their own pensions. Confronted with
thousands of products savers relied on financial advisers, many
of whom were loyal to Woodford, as well as “best buy” lists from
groups like Hargreaves Lansdown  HRGV.L . The 7 billion pound
wealth manager supported Woodford until the end.
    The strategy for Woodford Investment Management, which at
its peak oversaw 18 billion pounds, was to invest in riskier
unlisted companies alongside its big holdings in dividend-paying
blue-chips like cigarette maker Imperial Brands  IMB.L .
However, seemingly solid companies like Provident Financial
 PFG.L , the doorstep lender which was once a member of the FTSE
100 Index, disappointed. By the time Woodford’s Equity Income
fund was suspended in 2019, only 19 of the 72 companies it owned
three years earlier were showing a positive return.
    The lack of liquidity in Woodford’s funds hastened his
demise. When Kent County Council, one of his loyal clients,
yanked its 263 million pound investment, Woodford did not have
the cash to meet the demand. While savers believed they had
instant access to their money, his unlisted holdings were
difficult to sell, while his positions in listed companies had
become so large that they could not be liquidated without
further depressing the price.
    This flaw, which goes far beyond Woodford, is the lie of the
book’s title. When former Bank of England Governor Mark Carney
was asked about the Woodford implosion at a parliamentary
hearing, he explained that the problem could be systemic for
large parts of the asset management industry.
    Walker reckons regulators share part of the blame. The UK’s
Financial Conduct Authority authorised Woodford’s new firm in
record time even though he faced an open investigation into his
dealings at Invesco  IVZ.N . The regulator also allowed Woodford
to use outsourcing firm Capita Asset Services as a kind of
external regulator, or Authorised Corporate Director, even
though the fund manager was also the largest shareholder in the
provider’s parent company.
    Internal checks and balances also failed. In one incident
described in the book, Woodford planned to invest $250 million
into U.S. bioscience company Evofem  EVFM.O , despite having
only met an executive from the San Diego-based company twice in
London. When the Equity Income fund came close to breaching the
10% limit on assets invested in unquoted companies, he pressured
some of those firms to list their shares on the obscure Guernsey
Stock Exchange.
    Woodford’s demise also provides another nail in the coffin
of the active asset management industry. The growth of low-cost
index-tracking funds has put pressure on active managers to show
that they can add value. His successful contrarian bets appeared
to justify higher fees. But his clients would have been much
better off if they had entrusted their retirement funds to an
index fund.
    Walker juxtaposes the lifestyle of fund managers with the
pensioners whose money they manage. Woodford spent nearly 14
million pounds on a 1,000-acre country retreat in the Cotswolds
and test-drove a Ferrari in the carmaker’s private track in
northern Italy. Meanwhile, a 67-year-old owner of a bed and
breakfast lost a chunk of her retirement savings and is still
working as a result.
    Despite all this, Woodford doesn’t seem to think he’s beyond
redemption. Last month he unveiled plans to launch a new fund in
Jersey, managing only institutional money. But with the findings
of an FCA review into his failings yet to be published, a
comeback seems unlikely. The best Woodford should hope for is
that investors and regulators learn the lessons of his failings.
    On Twitter https://twitter.com/aimeedonnellan
    
    CONTEXT NEWS
    - “Built on a Lie: The Rise and Fall of Neil Woodford and
the Fate of Middle England’s Money” by Owen Walker was published
by Penguin Business on March 4.
    - For previous columns by the author, Reuters customers can
click on  DONNELLAN/ 
    - SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe

 (Editing by Peter Thal Larsen and Oliver Taslic)
 ((Aimee.Donnellan@thomsonreuters.com; Reuters Messaging:
Aimee.Donnellan.thomsonreuters.com@reuters.net))
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