Investors angry at Neil Woodford need to look closer to home

Turning an investment of £1,000 into £23,000 during his stellar 25-year reign at money management firm Invesco Perpetual earned Neil Woodford the accolade of "Britain's answer to Warren Buffett".

He was also known as “the City kingmaker”, a man with enough clout – and £25 billion (€28 billion) of funds behind him – to decide the fate of Ftse 100 bosses who failed to perform.

But now Woodford, who struck out on his own five years ago, is struggling to keep his investment empire afloat as his stock-picking skills desert him.

After two years of dire performance, assets of his flagship equity income fund have plummeted from more than £10 billion to just £3.7 billion. On Monday, as the rush to remove cash turned into a stampede, Woodford was forced to freeze further redemptions from the fund.

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Shares in Woodford's Ftse 250-listed investment trust, Patient Equity Capital, crashed by more than 20 per cent when the market opened yesterday, although the loss had moderated to about 7 per cent by the close.

At least investors are still able to trade Patient Equity shares. Those who kept faith in Woodford’s ability to pick winners and stuck with his equity income fund as it slithered down the performance tables are now locked in for at least four weeks.

This is designed to give Woodford breathing space to sell enough investments to cover redemptions. It is possible, if investors were to hang on long enough, that Woodford’s strategy would pay off, but they are unlikely to give him the chance once they have access to their cash.

Midas touch

Pressure has been building on Woodford for some time as he lost his Midas touch. But far from adjusting his stock-picking approach, he doubled down on his strategy of investing in domestic-focused businesses, taking large stakes in medium-sized companies and frequently topping up his holdings in the wake of share-price weakness.

These stakes can be tricky to offload, particularly at speed, and Woodford also has a high proportion of holdings in small, unquoted businesses, which are also illiquid.

Such a contrarian approach is all very well when the bets finally pay off. But how long were investors in his equity income fund supposed to hold on for things to come good?

As they watched their investments dwindle in value, spooked savers headed for the exit in their droves, with as much as £10 million a day flooding out of the fund over the past month.

The final straw looks to have been a request at the start of this week by Kent County Council for the return of about £260 million of its funds.

For them the last straw was probably the shock profit warning from Kier Group on Monday morning, news that sent shares in the construction and outsourcing firm plummeting by 40 per cent. Woodford is the largest single investor in Kier, with 20 per cent of the shares.

Other shares in Woodford’s portfolio have turned in even worse performances, such as doorstep lender Provident Financial, which has lost 80 per cent of its value over the past year and fell further yesterday on Woodford’s woes, as did struggling online estate agent Purplebricks, in which Woodford holds 28 per cent.

Fund frozen

Many investors are turning their anger on Hargreaves Lansdown, the Ftse 100 financial services company that has been a huge supporter of Woodford, even up until the fund was frozen.

Shares in Hargreaves Lansdown fell almost 5 per cent yesterday, as the market assessed the reputational hit the Woodford affair would deal the group, not to mention the loss of lucrative fee income.

In the end, though, investors must take responsibility for their own decisions. Questions will, quite rightly, be asked of Hargreaves over its continued championing of Woodford despite the fund’s performance – not least from its angry army of retail clients who put their money with the fallen star fund manager.

Kent County Council, meanwhile, said yesterday it was “disappointed” it was given no prior notification that the investment fund was to be frozen. But why should larger investors be treated differently from small investors?

The council is sitting on a £6.4 billion pension fund and has invested with Woodford since his Invesco days. It says it could still seek a “managed redemption” of its cash in order to maximise value for its fund.

But perhaps it should take a good look at its own investment strategy. Those who remember the Icelandic banking crisis of 2008 will recall that Kent County Council was exposed to the tune of £50 million when three Icelandic banks collapsed. Perhaps it’s just unlucky, but it was the largest exposure of any local authority in the UK.

Fiona Walsh is business editor of theguardian.com