Book review: When the Fund Stops

Richard Gill, CFA, reviews When the Fund Stops, the untold story behind the downfall of Neil Woodford, Britain’s most successful fund manager.

“It takes 20 years to build a reputation and five minutes to ruin it”, is one of Warren Buffett’s many quoted one liners. Perhaps no one knows this better than Neil Woodford, the former rock star money manager who was unceremoniously ousted from the fund he founded back in 2019 after racking up millions of pounds’ worth of losses for his previously loyal investors.

In his first book, When the Fund Stops, author and journalist David Ricketts covers the dramatic story behind Woodford’s rise and fall, examining how and why his multi-billion pound investment empire came to an abrupt end. While the events of Woodford’s downfall have been widely reported in the media, the book goes into greater detail on his personal life and business dealings, providing behind the scenes accounts of events and uncovering previously undiscovered aspects of this rotten saga.

Rising star

The first three chapters cover Woodford’s early life and career, up to the point where he ventured out alone and launched the now infamous Woodford Equity Income fund. After graduating from Exeter University in 1981, his first experience in the finance world came as an admin clerk at a commodities merchant. A dreary role, but a move into fund management a short time later set him on his destined career path. Working his way up the ranks, he got the job that made his name as a fund manager at Perpetual (later Invesco Perpetual) in 1988.

At Invesco Woodford impressed, with his Perpetual High Income fund being a consistent top performer and growing assets to £2.5 billion by the start of 2000. He even managed to avoid the dotcom bubble bust, shunning over-priced technology companies and earning a huge pay rise on the back of it. But for a variety of reasons he decided to leave and set up his own venture, Woodford Investment Management, in late 2013.

Eventually launched in June 2014 to huge fanfare, the Woodford Equity Income fund had no problem attracting investors, many of whom had redeemed their holdings at Invesco to follow the fund manager. One year into the new fund’s life it was doing well, up by an impressive 17.9% since launch. At that point the BBC wrote a shining article on Woodford dubbing him, “the man who can’t stop making money”. The article pointed out that anyone investing £10,000 with him 27 years previously and then following him to his new fund for a year would have a fortune worth £309,000 – that’s a compound annual return of 13.55% and outperformance of the wider stock market to the tune of almost £200,000.

Helped by a range of third-party promoters, not least Hargreaves Lansdown, the fund went on to become the bestselling investment product in the UK, growing assets to over £10 billion at its peak in 2017. Raking in the fees and his share of the dividends, Woodford was able to further build up his own fortune which by this point included a fleet of sports cars and a luxury country estate.

Falling star

From then on it was all downhill. In Chapter 6 Ricketts begins to explore some of the less liquid, speculative stocks which Woodford began to invest in and the problems they caused. For most of his career Woodford had favoured undervalued large-cap, listed stocks – stalwarts like Imperial Tobacco and AstraZeneca. But concerns had arisen over the fund’s increasingly large exposure to unquoted investments as its performance began to drop in 2017. Woodford’s peers were concerned he knew nothing about them and former colleagues criticised a lack of due diligence. There was also a feeling that a product sold as an income fund was actually investing in unsuitable high risk stocks. 

Going into 2018 Woodford was a troubled man, with the fund’s assets having fallen by £1.5 billion in 2017, since peaking in May. This was due to a mix of bad performance and investors beginning to flee with their savings. Chapter 7 examines the beginning of the end for Woodford, discussing the string of profit warnings and poor performance from a number of his holdings. Those collapsing in value since he first bought them included the likes of cat allergy drug firm Circassia, doorstep lender Provident Financial and car insurer AA, to name just a few! 

As the financial press got wind of the star fund manager losing his Midas touch, combined with a range of investment platforms removing the fund from their top buy lists, the dominos started to tumble. By the end of May 2019, the Equity Income fund had lost 17% over three years compared to a 28.4% rise in the FTSE All-Share, with total assets now around a third of their peak at £3.71 billion. The deathblow came in June when major investor Kent County Council decided to withdraw their c. £200 million holding with immediate effect. On the back of that decision, fund administrator Link quickly suspended the fund, leaving shocked investors unable to access their savings.

Black Hole

Despite Woodford’s best efforts to reposition the fund towards more liquid holdings, the decision to wind-up was made by Link in October, which also meant that Woodford had lost his job as fund manager. Shortly after he resigned from his remaining funds and the decision was made to shut the business. As last reported, £2.54 billion has been distributed to investors by the administrator following several asset sales, with just £200 million worth of assets left which are not expected to be sold until mid to late 2021.

The final chapter asks if such an event could happen again, with Ricketts also criticising some of the key players in the calamity. Link are condemned for selling many of the assets at fire sale prices, while the FCA have (once again) been slated for doing next to nothing to protect investors. Hargreaves Lansdown are rebuked throughout the book for continuing to push the Equity Income fund as a top buy, even as it underperformed. It looks like it will be a long time before the whole situation is over, with a number of legal claims being prepared against the various parties involved.

In a sense, you have to feel sorry for Neil Woodford. He meant no malice through the whole debacle, with his downfall coming due to investment decisions going wrong, some negative press attention and a perhaps rash decision by Link to wind-up the fund. On the other hand, not many would feel sympathy for someone who built up their own personal wealth while thousands of retail investors lost their own, especially given that Woodford continued to charge management fees during the suspension period.

Overall, When the Fund Stops is an exceptionally well researched page turner. Not only does it provide new and informative insights into the Woodford saga it should also give readers the foresight to ask more questions of their investment decisions when giving money to a lauded manager. It is essential reading for anyone who is thinking about investing in funds.