Sympathy for the devil: In defence of Neil Woodford

The Woodford debacle does not invalidate the case for active management, any more than the global financial crisis invalidated the case for having banks, argues Tim Price.

“A lot of people will tell you that Neil Woodford has been a victim. A victim of exchange traded funds. A victim of a growth-obsessed market. A victim of Brexit. A victim of overly prescriptive regulation. A victim of amateur investor panic. A victim of the media. But either way, he is a very rich victim indeed. And that is what sticks in the throat most about this sorry saga of mission creep, arrogance and ego. Someone’s made a huge pile of money since 2014. You were told it could be you. It’s actually been Neil Woodford.”

– Merryn Somerset Webb in The Financial Times, ’Neil Woodford broke the ground rules — now investors will pay the price,’ 5 June 2019.

“All investment gurus make bad decisions and have bad years — even Warren Buffett, with whom Mr Woodford has been compared. Going against the herd can bring results. Yet, perhaps thanks to the superstar status he attained, he was able to push to the limit many of the unwritten ground rules of the profession.”

– The Financial Times editorial, ‘Investors need answers over the Woodford affair,’ 7 June 2019.

The spectacle of our investment media collectively piling in on Neil Woodford is an unedifying one. Special mention should perhaps go tothe Financial Times, which spent years inflating Mr Woodford’s reputation – first at Invesco Perpetual, and latterly at his own business – with its liberal use of the adjective ‘star’. The Financial Times is now cheerfully tearing down that same reputation with gusto – much of the editorial comes across, to this reader at least, as old scores being grubbily settled. To be fair, Merryn Somerset Webb has always been sceptical about the cult of ‘star’ managers – and about the supposed value-add of big funds versus low-cost index trackers. But some of her colleagues at the ‘pink paper’ have covered this story with a zeal bordering on ghoulishness. Journalism, and especially financial journalism, can be an ugly business.

The case against Mr Woodford is already common knowledge. Few objective observers would, I suspect, challenge the view that at his new firm, if not before, he took in too much money, too quickly. Some might also say that there was too much duplication of individual investments across his various funds; that the regulatory system was aggressively gamed in order to maximise exposure to illiquid and in some cases unlisted securities; his business was overly reliant on a handful of key relationships; and that he made some problematic investments.

As a fellow fund manager and the owner of an independent asset-management business, I should probably add that I take absolutely no pleasure in Neil Woodford’s precipitous reputational decline. Here is someone who risked his own capital in setting up a business that is now struggling in an existential quest for survival − that he was richly rewarded during the process is hardly the point. The reputational damage alone could now prove terminal for the business – and possibly prevent any further corporate ‘adventuring’ on Mr Woodford’s part.

Neil Woodford built his previously solid reputation as an income manager at Invesco Perpetual. In 25 years at the firm he managed to turn a £1,000 investment into roughly £23,000. He survived the bursting of the dot-com bubble with his reputation enhanced thanks to a focus on “boring” defensives, notably tobacco stocks. He repeated the trick by avoiding bank stocks during the global financial crisis.

When Neil Woodford announced his departure from Invesco to set up on his own in late 2013, most analysts recommended following him. The reaction of one market observer, however, was particularly interesting. Brian Dennehy of FundExpert commented:

“Investor action over the past year has been telling. As superb as Neil Woodford has been, more than £500m has been withdrawn from his two flagship funds over the past year. This suggests that some time ago the funds became saturated. The risk for Invesco Perpetual now is that a significant leak could turn into a flood.

“If an investor holds no more than 10 percent of his or her portfolio in Mr Woodford’s funds, there is no need to panic. If more than 10 percent is held, alternatives should be considered.”

Those remarks are instructive and turned out to be prescient given the current liquidity crisis affecting Mr. Woodford’s Equity Income Fund. One of the reasons I find the current media ‘scrum’ around the tribulations of Woodford Investment Management so distasteful is that a dominant voice like that of the Financial Times has the power, literally, to change events − in the same way that Robert Peston’s revelation about Northern Rock seeking emergency support from the Bank of England back in 2007 quickly became a self-fulfilling prophecy. If Mr. Peston had exercised a modicum of discretion, the company might have survived. But by announcing its plight, he effectively triggered the bank run that ended it as a public company. The investment media have no particular obligation to maintain market stability during a time of company-specific crisis, but one wishes they could sometimes exercise some editorial restraint rather than encourage nervous investors over the edge, by fuelling fires that are partly of their own making.


Questions are rightly being asked about the close nature of the relationships between Woodford Investment Management and its professional counterparties, including fund platforms and outsourced custodians. But as the witch-hunt continues, why not also ask questions about the accountability of individual investors for their investment choices? I quote from the prospectus of LF Woodford Investment Funds II:

“Investors are reminded that in certain circumstances their right to redeem shares (including a redemption by way of switching) may be suspended”.

And also:

“Depending on the types of assets the sub-funds invest in there may be occasions where there is an increased risk that a position cannot be liquidated in a timely manner at a reasonable price”.

The prospectus itself runs to some 77 pages. If it were down to me, I would scrap much of the regulatory ‘boilerplate’ and have a large warning on the front page (of this and every other fund prospectus), in a large font and in red, saying simply: caveat emptor.

However, we seem to be trapped in a (highly regulated) system whereby nobody is ever actually held accountable for the decisions they make. More to the point, we seem to be trapped in a system where nobody should ever have to suffer anything of any kind – a point that trader and financial educator Chris Clarke makes in this recent interview.

We should not overlook the pivotal role played in Neil Woodford’s downfall by the Kent County Council Pension Fund, whose £263 million redemption request triggered the suspension of the Woodford Equity Income fund. If that organisation’s name sounds familiar, it might be because Kent County Council had £50 million on deposit with Icelandic banks during the global financial crisis. Enough said, perhaps.

The Woodford fiasco does not invalidate the case for active management, any more than the global financial crisis invalidated the case for having banks. But it is clear that the blame is widely distributed amongst the various players, including financial intermediaries who blithely followed a manager with an impressive track record, and professional counterparties who may well be found wanting at a parliamentary inquiry. The regulators themselves have hardly covered themselves in glory either.

But, what is done is done. I hope that Neil Woodford’s business survives. Its near-death crisis has emphasised that investing, even in supposedly ‘blue chip’ investments, carries risk. It has pointed out that capitalism is driven by that Schumpeterian tide of creative destruction. Entrepreneurs take risks, but not all get the prizes that they may or may not deserve. The lesson for investors is crystal clear: no matter how good an investment appears, the last line of defence is always genuine portfolio diversification.Brian Dennehy suggested a 10% limit for any one manager – and that’s a limit we endeavour to respect within our own firm, Price Value Partners, too.)

The reversal of fortune on display here shows just how quickly a thriving asset- management business can go into reverse. The lesson would seem to be that if it can happen to Neil Woodford, it can happen to anybody. As a reminder of the challenging nature of the investment game, it could not possibly have come at a better time.