Shoulda, Woodford, Coulda: Woodford Investment Management set to close

November 7, 2019

3 min read

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What's going on here?

Woodford Investment Management, an investment management firm, is closing, following a series of bad investments.

What does this mean?

An investment management firm invests its clients’ money. It chooses a wide selection of investments, from safe, slow-growing bonds to fast-growing, risky stocks. It ultimately aims to benefit investors, but with a level of risk that would create high returns if successful, but cannot be guaranteed.

Neil Woodford, who some referred to as “Britain’s answer to Warren Buffet”, started Woodford Investment Management in 2014. Woodford originally made his name at Invesco Perpetual, one of the largest investment managers in the UK. He resisted the “dot com crash” and also managed to shield himself from the 2008 financial crisis by selling bank shares. In Woodford’s 26 years at Invesco, people who invested a pension fund of £10,000 would have seen it finished with returns of £250,000. It was this success that led to Woodford resigning to launch his own business, Woodford Investment Management. At its peak, people invested £10 billion into Woodford’s flagship Equity Income Fund. However, following a series of troubled investments, Woodford Investment Management is set to close.

What's the big picture effect?

When Woodford initially set up his own firm he raised £1.7 billion in a fortnight. But in 2017, Mr Woodford’s flagship Equity Income Fund began underperforming, due to a series of bad investments. The Equity Income Fund was the second fund launched at Woodford Investment Management. It was preceded by the Woodford Patient Capital trust. 

In May 2019, investors were withdrawing £9 million per working day. Woodford could not sell assets and shares fast enough to keep up with the demand in June, therefore the fund was “gated” to prevent the withdrawal of any more money. The fund shrunk from £10 billion to £3 billion as investors withdrew their cash following difficulties at companies the fund was heavily invested in, including the AA, online estate agent Purplebricks, doorstep lender Provident Financial, and cold fusion firm Industrial Heat. These difficulties saw Woodford’s fund return 0.5% from October 2016-2017. This can be compared with a sector average of 11.4%; highlighting why investors pulled out. Despite this, Woodford continued to collect £65,000 a day in management fees from investors, even though he faced widespread public and political criticism.

On 15 October 2019, administrators announced that the suspended Equity Income Fund would be shut down, and Woodford was to be removed as the investment manager. By the evening, Woodford had resigned and announced Woodford Investment Management would close.

The saga has impacted faith in fund managers across the UK; scandals like this can put people off investing entirely. Hargreaves Lansdown, a financial services company, is facing a loss of about £1.9m in fees from the debacle. This is due to the fact that they are being questioned about whether they misrepresented the fund to investors. The Financial Conduct Authority (FCA) has also rejected calls to launch an investigation into its own role in the saga despite Woodford breaching FCA regulations by holding more than 10% in unlisted stocks.

Investors in Woodford’s Equity Income Fund have already lost 37% of their savings over the past three years and have been told to expect further declines as the wind-up process continues. It will be interesting to see if this incident leads to an overhaul of current regulation, as the scandal is likely to push regulators to crack-down on investment managers who break the rules, most likely using Woodford as an example.

Report written by Sarina Johal

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