- Two books delve into the events behind the collapse of Woodford Investment Management, and what we can learn from it
- Each can provide readers with fresh insights on the hazards of fund management
One of the most striking aspects of Neil Woodford's comeback plan might be its timing. When the disgraced fund manager told the Sunday Telegraph of plans to re-enter the industry a few weeks ago, hundreds of thousands of investors remained trapped in what was once the Woodford Equity Income fund. His reappearance has prompted a furious backlash, and calls for the long-awaited publication of findings from a Financial Conduct Authority (FCA) probe into the fund's demise.
The Woodford story is a convoluted one, but it can teach us valuable lessons about the risks behind investment funds and those who run them. So it is useful to see the recent arrival of two well crafted books on the subject: When the fund stops, by Financial News journalist David Ricketts, and Financial Times reporter Owen Walker’s effort, Built on a lie.
Given the complexity of events surrounding the demise of Woodford Equity Income, both authors do a commendable job of charting these intricacies. They note the rise and fall of Woodford – a high-achieving sports obsessive who, having failed to enter the RAF as a youth, slowly learned the ropes of the investment world until joining an upstart asset manager based in Henley, now known as Invesco. Three major sector calls helped make Woodford's reputation here: backing the unloved tobacco sector from the late 1990s, an avoidance of tech stocks in the run-up to the dotcom bust and a lack of exposure to banks when the sector toppled into the financial crash. Trouble would later arrive at his new venture, Woodford Investment Management (WIM): disastrous stock picks, the mass investor outflows that followed and the trouble Woodford had returning cash to exiting investors while also limiting his flagship fund's exposure to unquoted companies.
Ricketts' book ably traces Woodford's growing confidence (and later hubris), the conflicts that began to emerge at what is now Invesco, where his interest in unquoted companies would prompt concerns, and the factors behind his downfall.
He provides an accessible take, neatly summarising the affair while offering some good insider accounts. He notes, for example, that once the main Woodford fund had suspended trading, the manager's erstwhile cheerleaders Hargreaves Lansdown (HL.) came up with a plan for rival asset manager Aberdeen Standard Investments to take over both the suspended fund and Woodford’s Patient Capital investment trust – now Schroder UK Public Private Trust (SUPP) – and splitting their assets into a "good/bad bank" structure based on liquidity. This was put to Link Fund Solutions – the ultimate owner of the Woodford funds – but did not pass muster.
He also raises some pressing issues. At one point, a source hints at the risks of fund managers focusing purely on the long game, noting that Woodford had stuck with his old investment style even as markets had grown more sophisticated. “There was a degree of complacency because he was so long term,” they add. Elsewhere, Ricketts' sources point to other risks – including the prospect of fund managers who set up their own business getting distracted from the investment process.
But if When the fund stops is insightful, Walker's account goes even deeper. The book is perhaps more demanding at first – Walker seems to spend greater time taking us through Woodford's rise, and occasionally focuses on details that seem slightly off topic. An early discussion of the various controversies surrounding Woodford backer St James's Place (STJ) seems interesting but not directly relevant.
Yet Walker's measured pace really pays off later on. The story ultimately gathers huge momentum, capturing the extent of the pressure piled on Woodford as investors fled his fund, driving him to take increasingly erratic measures to keep a lid on his unquoted exposure.
This is bolstered by Walker's strong eye for detail and nose for news. The book includes various revelations – including when, having left WIM in late 2014 after disagreements about Woodford's due diligence, two of the company's founders then relayed their concerns to the FCA, which seemingly failed to act. Other details are similarly breathtaking: Walker writes that the FCA insisted WIM use the services of Link (then Capita Asset Services) despite its checkered past, for example. The author also notes some details not widely discussed at the time, such as Woodford's decision to quietly transfer unquoted assets from his flagship fund into other portfolios in late 2017.
As its title (a Mark Carney quote) hints, Built on a lie pulls no punches. Walker criticises the FCA, Link, Hargreaves Lansdown and the financial press for their involvement in the affair, but also turns to the little known figure of WIM boss Craig Newman. Walker consistently draws a contrast between the experiences of Woodford's investors and employees (who ultimately lost their jobs) with Newman and Woodford himself, who would pay themselves handsome dividends even as they got deeper into trouble.
Ultimately, both of these books offer fresh revelations about the scandal, while asking important questions about what we can learn. But Walker's account sheds greater light.