19 October/20 October 2019 ★ FT Weekend 13
their money back in droves, and a suc-
cession of long-term clients — including
Aviva Investors, Jupiter Asset Manage-
ment and the Abu Dhabi Investment
Authority — deserted the funds.
In order to pay back fleeing investors,
Mr Woodford was forced to sell the easi-
er-to-shift shares in large listed compa-
nies. But that meant his funds were soon
breaching regulatory defined limits of
having no more than 10 per cent of a
fund’s assets in unquoted companies.
Despite having been given warnings
about the lack of a strong compliance
culture within the Woodford business
from several former staff and clients,
this was the first time the FCA inter-
vened. The regulator began asking
Woodford’s administratorfor monthly
updates on the portfolio and how easy it
was to trade, known in the industry as
its liquidity.
But unknown to the regulator, Mr
Woodford had hatched a plan to try to
escape this self-imposed liquidity trap.
He began to list his stakes in some pri-
vate companies on the Guernsey stock
exchange. As he was not offering to sell
them, they were not technically liquid,
but they were classed as quoted shares,
which meant they would not breach the
10 per cent limit.
On May 30 this year, the FT reported
that Woodford’s flagship Equity Income
fund was shrinking at an alarming rate
due to severe underperformance and
investors withdrawing £10m a day. The
next morning the board of the Kent
county council pension fund,a long-
standing clients,decided it hadhad
enough. But when it tried to recoup its
£263m investment — then equal to 7 per
cent of the fund — Mr Woodford did not
have the cash available.The manager
had no choice but to suspend the fund,
locking in indefinitely the hundreds of
thousands of remaining investors.
The closure sparked Europe’s biggest
fund management scandal for a decade.
It prompted a UK parliamentary probe,
investigations from several national
regulators and a crisis of confidence
among consumers in investment funds
that Bank of England governor Mark
Carney claimed were “built on a lie”,
because they were unable to pay inves-
tors back daily as promised.
For four months, the hordes of inves-
tors stuck in Equity Income — close to
300,000 of whom were Hargreaves
Lansdown customers — looked on in
anguish as the value of their savings
dwindled, while Woodford’s company
received more than £8m in fee income.
The fund’s administrator, Link,
enlisted US investment boutique PJT
Partners to try to sell the unquoted com-
panies. But by last weekend, the bank
had received insufficient interest in
about £150m of unlisted investments.
Link decided the risk of the fund reo-
pening and then being forced to suspend
again was too great.
On Monday afternoon, it told Mr
Woodford and Mr Newman during a
meeting in the administrator’s London
offices that the game was up. It would
remove Mr Woodford as manager of the
fund and liquidate its holdings.
Realising the business could not go on
without its main source of fee income,
Mr Woodford made a bombshell
announcement the following evening
that he was closing the company, add-
ing: “I personally deeply regret the
impact events have had on individuals
who placed their faith in Woodford
Investment Management and invested
in our funds.”
The statement brings an end to the
most remarkable and controversial
career in British fund management. But
the fallout from the scandal is just
beginning. Mr Woodford’s downfall will
have widespread consequences not just
for the customers locked in his funds
but also for the broader industry. The
focus is rapidly switching to the roles
played by Hargreaves Lansdown, St
James’s Place, the FCA and Link.
“If there is anything good to come out
of this it is that investors will move away
from the industry’s Hollywood-style
culture of star worship,” said Jonathan
Little, an investment industry veteran
who has run several businesses.
For now Mr Woodford and Mr New-
man are keeping a low profile. On
Wednesday, the car park at their
Oxfordshire headquarters, usually filled
with Jaguars, Range Rovers and Mr
Woodford’s Porsche Cayenne, was
deserted.Staff who had not already
been let go were working from home.
It is a crashing comedown from the
raucous celebrations at the nearby
Crazy Bear bar five years ago — and one
that will leave a lasting hangover for the
UK’s investment industry.
Additional reporting by Anna Gross and
ArchieHallwell-known advisers were blasé, insist-
ing his career had followed a pattern of
eye-watering returns followed by leaner
periods.
In an FT interview in late 2017, Mr
Woodford admitted he doubted his
investment judgment every day. “You
must never, as a fund manager, stick
your head in the sand saying ‘Every-
body go away, I’m right, I’m right, I’m
right’. You’ve always got to expose your-
self to criticism and the analysis that
you may be wrong.”
But he added that successful fund
management needed a mix of arrogance
and humility. “You have to have a suffi-
ciently strong arrogant gene to back
your judgment, back your conviction. If
you didn’t, you would end up with a
portfolio that looks very much like the
index. But, equally, you must have the
humility to accept that you will get
things wrong.”
With the business seemingly on a firm
footing, Mr Woodford and Mr Newman
restructured it in a way that enabled
them to be paid in dividends, thereby
reducing their personal tax charge.
There was enough profit to pay out
£98m between 2014 and 2018, with
two-thirds going to Mr Woodford and
the remainder to Mr Newman.
Butshort-term underperformance
soon started to look like longer-term
decline. Throughout the second half of
2017 and into 2018 Mr Woodford’s funds
started to lag far behind competitors’.
The star manager and his supporters
played down investors’ concerns, saying
the portfolio was hampered as Brexit
uncertainty weakened the UK economy.
Mr Woodford would tell his clients that
once Britain left the EU, overseas money
would flow into the UK and boost the
companies in his portfolio.
The funds were also hit by a series of
blow-ups. Chief among them was Proth-
ena, a US biomedical company that
Woodford owned one-third of, which
was valued at $1.5bn. In April 2018 the
business reported the failure of an
important clinical trial and within an
hour of the market opening, its share
price had nosedived 70 per cent.
Mr Woodford’s fans, including Mr
Dampier and his colleagues at Har-
greaves Lansdown, continued to insist
the renowned stockpicker would come
good again — but fewer investors were
listening. Customers began demandinglittle direct influence over. He was set-
ting himself traps from which it would
be hard to escape.Move to the country
Outside of work, Mr Woodford had
remarried and begun taking a keen
interest in horseriding, a passion of his
wife Madelaine. He had lived in the
former home of Formula 1 magnate Fla-
vio Briatore in Buckinghamshire until
2014, but fell out with neighbours
including TV presenter Jeremy Paxman
over plans to build 28 stables and a dres-
sage arena on the property.
The couple moved to a 423-hectare
farm in the leafy Cotswolds,an hour’s
drive from his Oxford office. The
sprawling estateincluded several stable
blocks andindoor and outdoor training
facilities for Mr Woodford’s growing col-
lection of eventing horses.
The location provided the fund man-
ager with an entrée to England’s equine
elite, with Zara Tindall, granddaughter
of the Queenand a former world and
European equestrian champion, a
neighbour.
Ms Tindall’s farm is set on the 600-
acre estate of her mother, Princess
Anne, another former European eques-
trian champion and Olympian. Each
August her Gatcombe Park estate hosts
the Festival of British Eventing.
Mr Woodford began to spend so much
time on his horse that the company
brought in phones with special record-
ing functions so he could make trading
instructions while out riding.
Back on the Oxford industrial estate,
problems were festering. The company
failed to find long-term replacements
for Mr Smith and Mr Hamilton. A suc-
cession of risk and compliance manag-
ers passed through a businessbecoming
increasingly dominated by Mr New-
man.
The atmosphere became more boor-
ish and macho, according to former
workers. Even as the number of workers
grew to more than 40, only a handful
were women — with none in thetop
ranks. Smutty jokes were rife. A senior
investment team member used to say:
“If trading was easy, birds would do it.”
Another manager at the company was
found to have pornography on his work
computer. The junior member of staff
who reported the incident was sacked,
according to two former employees.
Woodford denies the allegation.
One former worker told the FT she
felt intimidated by the environment
and avoided staying late at social occa-
sions because of how boozy and boister-
ous they could become.The empire crumbles
Looking back, the summer of 2017 was
the high point for Woodford Investment
Management.It had attracted £15bn
from investors — just under half the
total Mr Woodford had managed at
Invesco. Investment performance had
dropped off since the initial few months,
buthis cheerleaders at Hargreaves
Lansdown, St James’s Place and otherNorth Carolina business that attempted
to develop power sources based on ideas
at the fringes of modern physics. The
company also attracted investment
from actor Brad Pitt and Laurene Powell
Jobs, Steve Jobs’ widow, among others.
But Mr Woodford ploughed in much
more than the otherbackers, investing
£54m to own a quarter of the business.
Mr Woodford also invested in dozens
of technology and science start-ups
from the Oxfordshire area around his
base, straying further and further from
the larger, established businesses on
which he had built his reputation.
“These start-ups are notorious for
requiring funding round after funding
round and success rates are low and
seemingly random,”said a rival fund
manager.
“He was doing something very differ-
ent from that on which he had built his
career, track record and reputation.”
Having spent most of his career in
Henley, Mr Woodford had been cut off
from the centre of the UK’s fund man-
agement industry in London’s Square
Mile. As a result, his contacts book was
much thinner than those of his peers.
He relied on a small group of brokers to
bring him prospective companies to
invest in, centred on boutique banks
such as Cenkos and Numis.
“Neil was very good at selecting large
public companies, looking at corporate
documents that all have rules and regu-
lations around them,”said a former col-
league.
“He basically applied the same think-
ing to private companies, where it’s
‘Next year, we’re going to get this drug
authorised and we’ll make billions’. He’d
say, ‘I’m in for that’.”
Limited due diligence was done, the
person added. “Every company that
came in, he wanted to invest in.”
Mr Woodford expected investor cash
to continue to pour in and assumed one
day the total value of the private hold-
ings would be a fraction of the overall
portfolio. But unlike private equity
firms that specialise in unlisted compa-
nies, Mr Woodford made large bets
without taking overall control of the
companies, leaving himself with hard-
to-sell positions in businesses he hadNewman told a colleague at the time.
In tense meetings between the four
founders, viewed through the glass
meeting room partition by the rest of
the company’s staff, Mr Newman would
pace around blasting obscenities.
“There was plenty of shouting, swear-
ing, using every expletive, for an hour or
two at a time,”said a witness. All the
while Mr Woodford silently simmered,
turning the bezel on his chunky
designer watch.
Money flows in
For the next two years, Mr Woodford’s
business boomed. In its first 12 months,
his main fund, Equity Income, returned
20 per cent, making it one of the best-
performing funds focused on UK stocks.
Many of the smaller companies he had
invested in benefited from being associ-
ated with im, and their value soared.h
Much of the money came from one
source: Hargreaves Lansdown. Wood-
ford had a longstanding relationship
with Hargreaves, which acts as a mid-
dleman between millions of individual
savers and fund managers. It had grown
over three decades from its launch in
the spare bedroom of one of its found-
ers, to become the dominant channel for
consumers to buy investment products.
Now it was a public company and
entrenched in the FTSE 100.
Mr Woodford’s sales team and Har-
greaves struck a deal where the fund
manager would offer a discount on its
products to the fund supermarket, in
return for heavy promotion. Hargreaves
added Woodford’s funds to its “best
buy” lists of recommended products.
Mark Dampier, head of research at
Hargreaves, who has known Mr Wood-
ford for more than 25 years, was one of
the most enthusiastic backers of the
new business. At the launch of Equity
Income he informed Hargreaves’ cus-
tomers he and his wife were investing
and called the manager “remarkable”.
The plan worked and thousands of
savers opened accounts with Har-
greaves to invest in Mr Woodford’s
funds. Equity Income’s value soon over-
took Mr Woodford’s former main fund
at Invesco, reaching £6.7bn in July 2015.
Around this time, Mr Woodford
launched a listed investment trust,
known as Patient Capital, which aimed
to back mainly small companies with
the potential for exponential growth.
Attracting £800m at launch, it was the
UK’s biggest-ever fundraising for an
investment trust.
But not everyone in the Oxford busi-
ness park thought setting up a fund to
specialise in early-stage companies was
the best use of the manager’s time and
resources. A key reason to do it was to
“satisfy Neil’s desire”, says a former col-
league. “It’s his guilty pleasure to do
these unquoted deals, to be the big man.
‘I’ve got a massive cheque book — I am
going to write something that is just
going to change your world’.”
One small company that caught Mr
Woodford’s eye was Industrial Heat, a
continuedfrompage 12
Neil Woodford had built a strong career
beating the market
Value of invested (rebased)Sources: Invesco; Refinitiv FTSE Invesco Perpetual High Income FTSE All-Share
under Woodford Outside his fund
management
work, Neil
Woodford
remarried and
enjoyed
equestrian
pursuits,
making trading
instructions
while out
riding —Paul
Smith/Ultimate-Images‘You’ve
always gotto expose
yourself tocriticism
and theanalysis
that youmay be
wrong’‘The man
who can’tstop
makingmoney’ was
forced toclose his
businessFT INVESTIGATION
OCTOBER 19 2019 Section:Companies Time: 18/10/2019- 19:03 User:alistair.fraser Page Name:CONEWS4, Part,Page,Edition:USA, 13, 1