Financial Times Europe - 19.10.2019 - 20.10.2019

12 ★ FT Weekend 19 October/20 October 2019

T

he Crazy Bear in Stadhamp-

ton, an hour’s drive from

London, was the perfect

setting to celebrate Britain’s

most successful investment

company launch. Garish chandeliers

hung between wooden beams as guests

jostled for space among the ice buckets

filled with magnums of champagne.

At the centre of the bar was Neil

Woodford, the UK’s best-known stock-

picker. By his side was Craig Newman,

his ambitious business partner and

minder. Giddy optimism filled the air.

“Things got really out of control — peo-

ple were absolutely hammered,” says

one person who was there.

It was May 2014 and the pair had

recently left their longtime employer,

Invesco Perpetual, to set up on their

own. The launch of Woodford Invest-

ment Management was a resounding

success. In just three months, the com-

pany’s founders had navigated the

fiendish regulatory application process,

gaining approval in near-record time.

Meanwhile, a handful of financial

institutions, made rich by Mr Woodford

over two decades, agreed to move bil-

lions of pounds to the new venture. St

James’s Place, the popular wealth man-

ager, chipped in £3.6bn.

Having spent years battling col-

leagues and bosses at Invesco, Mr Wood-

ford and Mr Newman were finally free

to build their own business the way they

wanted — away from restrictive compli-

ance managers with the power to rein in

risky investments.

The party carried on until 4am. Hours

later police were called to the Woodford

offices in a dreary business park on the

outskirts of Oxford. A senior employee,

still heavily intoxicated, was seen driv-

ing his car around the car park. The

police arrested Grant Wentzel, Wood-

ford’s head of trading, who had been

behind the wheel. Mr Wentzel, who

declined to comment, was acquitted of

the drink-driving charge.

Mr Woodford’s career is a story

packed with spectacular highs and

crashing lows — the star fund manager

who fell to earth. Once described as the

investor who made Middle England rich

and the “the man who can’t stop making

money”, he was forced this week to close

his business, which once managed

£15bn, after trapping hundreds of thou-

sands of savers in his flagship fund and

sparking Europe’s biggest investment

scandal for a decade.

His dramatic downfall is about more

than a high-powered financier who lost

his midas touch. It is a tale of hubris,

obstinate conviction and misplaced loy-

alty. It exposes the flaws of a timid regu-

lator and an industry in thrall to its star

performers. Over four months, the

Financial Times interviewed dozens of

Mr Woodford’s former colleagues, busi-

ness contacts, clients and friends — and

gained access to a trove of confidential

documents — to build up a detailed pic-

ture of an investor who became a house-

hold name, how he fell from grace and

how much investor money has been

squandered.

The early years

Neil Woodford was born in 1960 and

grew up in Berkshire, the son of a post-

card printer. After studying economics

and agricultural economics at Exeter

university, he began investing at Perpet-

ual, an upstart fund management busi-

ness in the genteel surroundings of

Henley-on-Thames, in the late 1980s.

It was here that he established his rep-

utation as a contrarian fund manager

who took bold bets on unloved compa-

nies. Some of his biggest calls paid off

spectacularly — including avoiding

technology companies during the dot-

com bubble and selling out of banks in

the run-up to the financial crisis. His

faith in controversial businesses such as

tobacco companies long after they were

seen as toxic by more ethically driven

rivals also boosted returns.

During his 26 years managing money

in Henley, Mr Woodford built one of the

strongest performance records among

UK-focused investors. Savers who

invested £1,000 with him in 1988 saw

their pots grow to more than £25,

over 25 years. He was a favourite of the

personal finance pages, eventually mar-

shalling £33bn of life savings for hun-

dreds of thousands of British investors.

“Having the strength of character to

maintain this conviction during times

when it was seriously questioned by

others is what built Neil’s reputation

over a long period of time,” said Andy

Bell, founder of fund distributor AJ Bell,

in which Mr Woodford was an early

investor.

His influence was on show in 2012

when, as the largest shareholder in

FTSE 100 defence group BAE Systems,

he spoke out against its planned merger

with EADS, the owner of Airbus. His

intervention helped scupper the €35bn

mega-deal. A year later, he received a

CBE in the Queen’s birthday honours list

for services to the economy.

The fund manager’s success belied

problems brewing within his company.

In 2000, the Perpetual business had

been bought by Invesco, one of the

world’s largest money managers. A

clash of cultures developed. US execu-

tivesin Invesco’s Atlanta headquarters

viewed the UK office as a regional out-

post within the global empire, whereas

Mr Woodford and his fellow Henley

fund managers saw themselves as the

superstars who had built up the busi-

ness through their exceptional talents.

Invesco’smanagers feared the UK

division was too reliant on Mr Wood-

ford’s personal brand and wanted to

grow other products. Yet Mr Woodford’s

bonuses were heavily skewed towards

attracting more money into his fund.

While Mr Woodford had tight-knit

relationships with his UK equity fund

managers, often socialising and even

holidaying with them, hostilities with

the Atlanta executives were rising.He

became embittered with Invesco’s lead-

ership, whom he blamed for restricting

the growth of his fund and crimping his

bonus. “It was always ‘the fucking

Americans’,” said one former friend.

Mr Woodford’s resentment eventu-

ally spread to his teammates. He

appeared to believe he was solely

responsible for the billions that poured

into Invesco’s British funds and that his

colleagues were riding on his coattails.

He began to distance himself from

them. Rather than sitting on the same

desk with his team,Mr Woodford

ordered a glass office be built where he

could shut himself off, according to two

former Invesco colleagues.

His angerbubbled over and affected

the mood in the Henley office. A former

colleague remembers how the heavy-set

former rugby player would refuse to use

his security pass when entering meeting

rooms with magnetic locks on the door.

“If he was angry he would just rip it

open. You would hear this shuddering,”

says the former colleague. “You can

imagine the facilities team at Henley,

how many magnetic locks they must

have replaced.”

Around 2010, Mr Woodford began

taking an interest insmall, private com-

panies that offered opportunities for

exponential growth. This was a big

departure from the larger, unfavoured

companies on which he had built his

reputation. But having more than

£30bn at his disposal, writing some big

cheques to back a handful of moonshot

bets seemed a gamble worth taking.

One company that caught his eye was

a US biomass conversion group, Xyleco,

whose board included former US secre-

tary of state George Shultz and former

US energy secretary Steven Chu. In

March 2012, Woodford agreed to invest

$252m in the company for a stake of less

than 7 per cent, which valued the busi-

ness at more than $3.5bn, according to

documents seen by the FT. This was a

large amount for a company that was lit-

tle more than a collection of scientific

patents.

When the managers in Atlanta found

out about the investment they were

alarmed and decided they needed to

prevent Mr Woodford from taking any

more risky punts. They created an inter-

nal committee to assess investments in

private companies — which excluded

the fund manager.

The UK watchdog, the Financial Con-

duct Authority, had also caught wind of

Mr Woodford’s more adventurous

instincts. Between May 2008 and

November 2012, the FCA noticed three

Invesco funds had taken on excessive

risk and too much debt, resulting in

losses of £5m for clients. Two of the

funds were managed by Mr Woodford.

The regulator began an investigation

into the breaches.

Mr Woodford was not the only

Invesco employee who felt betrayed by

the company’s decision to promote

other funds. Mr Newman, who as head

of retail sales was responsible for selling

Woodford funds, was also in line for a

smaller bonus. Sensing Mr Woodford’s

frustration with Invesco, Mr Newman

persuaded the stockpicker to leave and

set up on their own. “Craig smelled

blood in the water,” recalls one of the

former Invesco workers.

Mr Newman was challenged after lists

of client and sales information were

allegedly taken from Invesco, and he

resigned. The contentious documents,

seen by the FT, contained details of how

much institutions had invested with Mr

Woodford at Invesco and estimates of

fees the new company could extract

from them.

A Woodford spokesman said Mr New-

man had denied any wrongdoing and

resigned, adding the terms of his depar-

ture were subject to a confidentiality

agreement. Invesco says Mr Newman

resigned on May 31, 2013 and it could

not comment onstaff departures.

Mr Newman threw his energy into the

launch of the new investment company.

But he needed Mr Woodford to convince

former clients to move their money.

“Craig is 100 per cent money-driven.

Neil was very well paid at Invesco, but

Craig managed to convince him that

Invesco weren’t looking after him,” says

a person who has worked with both

men. The plans for Woodford Invest-

ment Management were in motion.

The break away

When Mr Woodford informed Invesco

he was leaving to set up his own business

in late 2013, he managed to negotiate an

incredible deal. Not only did he avoid

signing a non-compete agreement,

which is common when high-profile

employees go solo, but he also arranged

to retain management of large sums of

money for the groupup until his new

venture launched.

Mr Woodford and Mr Newman — who

despite a lack of senior management

experience would become chief execu-

tive of the new business — drafted in

Nick Hamilton, who had worked with

the pair as head of global equity product

at Invesco; and Gray Smith, a lawyer

from London firm Mishcon de Reya who

worked for Woodford during the FCA

investigation. he four of them wouldT

lead the new business, each becoming a

partner. Woodford also convinced a

handful of junior analysts to join him.

The application process “shot

through with very little challenge”, says

one person involved at the time. That

was despite the investigation by the reg-

ulator into Invesco rule breaches, which

resulted in a £18.6m fine for the com-

pany days before Mr Woodford

launched his new business. The FCA

says it did not find any evidence to sus-

pect or take action against individuals.

“Given there was no sanction against an

individual the FCA authorised Wood-

ford in line with its standard processes.”

Meanwhile, in Mr Newman’s applica-

tion for regulatory authorisation, seen

by the FT, he provided no details of his

abrupt departure from Invesco. When

asked whether he had ever been “the

subject of an investigation into allega-

tions of misconduct or malpractice in

connection with any business activity”,

he responded “no”.Woodford Invest-

ment Management says Mr Newman’s

form was completed properly with the

benefit of legal advice, and in accord-

ance with his obligations.

By May 2014, Woodford Investment

Management was up and running and

money began to gush in.

Mr Newman’s “violent transparency”

policy — a rare approach, later disman-

tled, that gave clients detailed access to

investment information, including the

funds’list of holdings — would be well

received by investors and advisers, as

would the business’s clear fee structure.

Several large clients from Invesco fol-

lowed Mr Woodford to his new home in

the Oxford business park, including

more than £200m from the Kent county

council pension fund.His sales team

expected to make more than £3m a year

in fee income from the latter alone, out

of total revenue of £15m from institu-

tional clients. This did not include the

money expected from the armies of

retail investors that intermediaries such

as St James’s Place and Hargreaves

Lansdown, the fund supermarket,

brought with them.

Woodford was soon managing more

than £5bn — an incredible start for a

business just a few weeks old.

Up to that point, the hard work had

mostly been carried out by the legal and

operations team. Almost all the money

that had flowed in was from Invesco cli-

ents. But despite there being hardly any

new business, Mr Newman soon lav-

ished his handful of sales staff with

bonuses totalling more than £1m. The

two team managers each received

£350,000, while more junior sales staff

were given £184,000 each.

Mr Newman and Mr Woodford also

treated themselves. Mr Woodford

bought himself a Ferrari and, as an

added perk, the carmaker let him visit

its private test track near Maranello,

northern Italy, to try out the model. Mr

Newman joined him.

The trip prompted some resentment

from others on the team — particularly

those who had missed out on the

bonuses. “It was a two or three-day

boys’ trip at what was a pretty busy

time,” recalls one former colleague.

Tensions were also brewing between

the founders. Despite assurances that

the company would be run by four part-

ners, Mr Hamilton and Mr Smith were

pushed out. The new business was going

to be a two-man show: Mr Woodford

and Mr Newman.

In an echo of the problems at Invesco,

Mr Smith and Mr Hamilton began chal-

lenging the way Mr Woodford and his

team of junior analysts were valuing

small private companies, which relied

heavily on data the businesses provided

themselves. They tried to put a limit on

the fund’s assets in private companies,

well below the 10 per cent cap defined

by regulations. Woodford’s unsuccessful

battle to keep below that cap was a cen-

tral factor behind his subsequent down-

fall. “This is not a fucking control envi-

ronment, this is about giving Neil the

freedom he did not have at Invesco,” Mr

continuedonpage 13

Neil Woodford —

the rise and fall

of a rock star

fund manager

After years

battling

colleagues and

bosses at

Invesco, Neil

Woodford set

out to build a

business with

Craig Newman,

below

Stockpicker’s undoing is a tale of hubris,

obstinate conviction and misplaced loyalty

By Peter Smith and Owen Walker

‘If he was

angry he

would rip

[the door]

open’

Woodford

bought

himself a

Ferrari and

visited the

carmaker’s

test track

FT INVESTIGATION

‘This is

about

giving Neil

the freedom

he didn’t

have at

Invesco’

OCTOBER 19 2019 Section:Companies Time: 18/10/2019- 19:03 User:alistair.fraser Page Name:CONEWS3, Part,Page,Edition:USA, 12, 1