InvestmentsFeb 25 2021

What Woodford's new venture might look like

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What Woodford's new venture might look like

The setting is the upstairs room of a Soho restaurant. It is early 2017. 

Fund manager Neil Woodford is still riding high. His Woodford Equity Income fund has started to underperform in recent months, but investors remain keen, and the manager's prognosis that the FTSE 100 would rise in the aftermath of the Brexit vote due to the fall in sterling proved prescient, reinforcing his image as someone capable of getting the 'big calls' right. 

Assets were rising steeply in his income fund, and the Patient Capital investment trust he launched broke all records for an IPO by an investment trust.

An event is held to announce the launch of the third (and they say final) fund in the Woodford Investment Management stable. 

When the manager enters the room, those expecting wanton charisma or a towering presence to justify the hype would be disappointed. 

Woodford retains his faith in the 'value' stocks that litter his portfolio, the underperformance of which was just beginning to hurt his relative returns. His confidence in unquoted companies in sectors such as biotech remains undimmed. 

It has been made clear to journalists that we will get just one question each, and I figure this could be the last time for a while I can put a question to Woodford.

“Do you ever think you might be wrong? And is there anyone in your firm to tell you you're wrong?"

He replies: “I question myself every day. I always ask myself if I am wrong, don’t get the impression otherwise. And believe me, my office is full of people who are well able and willing to tell me I’m wrong, and who do tell me I’m wrong.” 

Act two 

Now it is February 2021, two years after the collapse of his fund management empire, and Woodford has something new to say.

The investment business he was celebrating in Soho almost exactly four years earlier lies in ruins.

It looks as if Woodford is looking for vindication that his original investment strategy was correct all along Ryan Hughes, AJ Bell

He was fired from the Equity Income fund after it was forced to suspend redemptions as poor performance lead to a wave of outflows. That was sufficient to force him to quit his other funds. 

The large office near Oxford is gone, replaced with a serviced premises. There are no Soho restaurants for Woodford’s return, no 'old Woodford hands', to ask the questions.

In an interview with a Sunday newspaper, there is an apology, of sorts. He said he is “sorry for the things he didn’t do”. But he maintains many of his former convictions. He directs the blame at fund administrator Link, for firing him too soon, and said many of the unquoted assets that were at the centre of the storm have subsequently risen in value, with investors in his old funds the losers.

His representatives say the old Woodford Investment Management business is “an ongoing business”. But now there is a new chapter: Woodford Capital Management. 

While this may have echoes of a Greek tragedy – a once successful man, failing spectacularly, and now trying to regain the reputation he lost – Woodford is adamant that he is on track to establish the new venture. Investors, particularly the many still nursing heavy losses from their WIM investments, are looking on sceptically.

So, what does this new investment business entail? And should it be taken seriously?

The new business is registered in Jersey. Woodford's representatives say they “intend to work with institutional investors, high-net-worth individuals and family offices, and Jersey is a well-respected and established offshore centre”. 

The company also has an office in Marlow, in Buckinghamshire. 

Woodford representatives note the first line of business is advising a private equity company on the portfolio of unquoted assets they bought from Woodford's old fund business. There is some debate over whether this amounts to a new fund, with Woodford's representatives insisting that it is not.

It is also unclear what role the old WIM business will play in future.  

However, given the new focus on institutional and family office clients, one approach that may be coming is the creation of limited liability partnerships.

LLPs are collective investment vehicles, which are not funds, but which are used in the private equity sector. The fact the new products will not offer daily liquidity also points towards it being closer to a private equity model than a mutual fund.

Woodford has said his next product will not have daily liquidity, as he now accepts the ability of the investor to withdraw their cash at one day's notice is not conducive to investing in early stage and illiquid assets. 

In a LLP structure, a new vehicle is set up for each investment or small group of investments. Each client would then be made a 'partner' in the new investment, with Woodford Capital Management being the general partner or managing partner in each of the separate investment structures. 

Apart from not permitting daily dealing, the second advantage in terms of liquidity, is that if a client wants their money back, they can only get it from the partnership in which they are invested; all of the other partnerships operate separately, even if all were to be managed or operated by Woodford Capital Management. 

Partners

In terms of fees, there are two approaches. In a limited partnership Woodford Capital Management would receive a substantial return if the return is above a certain level, known as a 'hurdle rate', which could be 10 per cent. 

This would bear some similarity to how Woodford ran the Patient Capital trust, whereby his company did not get paid until an annual return of at least 10 per cent was achieved. Ultimately, such a level of return was never delivered. 

Under a LLP structure, Woodford Capital Management would be a managing partner in each of the funds, and receive a management fee that is separate to any returns achieved.

Both structures are common in the world of private equity and venture capital, though in the former instance the funds tend to have a 'limited life' of, say, 10 years, whereby the fund is wound up at the end and any assets are sold or distributed to investors. 

In both instances, the minimum investment levels are high and the products are ultimately not marketed to retail investors or independent financial advisers. 

When Woodford started his new fund management company in 2014, he said the intention was to make a WIM “unlike any of the incumbents”, as he wanted to use new technology to be more transparent with clients. 

This included publishing a list of all of the holdings in the fund. The company later changed course on this practice, claiming that the openness was creating additional problems. When stocks fell, the moves created a wave of headlines, even at times when the fall or the investment was modest. 

And as the outflows increased on the fund, some suggested that short-sellers were aware of which of the less liquid stocks might have to be sold to meet redemptions, and so were able to take short positions in those stocks, and take advantage of the subsequent fall when some of the shares were sold. 

That served to reinforce the narrative that the man of the hour was on borrowed time. 

As the clouds gathered over the business, the transparency was reduced to the point where the Patient Capital trust board was not happy about how, and when, Woodford communicated his sale of £1m worth of shares he personally held in the trust. 

Not easily forgotten

The picture is even cloudier nowadays. The manager has started trying to make a comeback before the Financial Conduct Authority has completed its investigation into WIM, and while investors are attempting to sue Link, Woodford's fund administrator.

Unsurprisingly, then, most have taken a dim view. Ryan Hughes, head of active portfolios at AJ Bell, says: “The news that Woodford is looking to make a comeback will come as a surprise to many, especially those thousands of embattled investors who are still waiting to get the last of their money back.

"With around £200m of money still stuck in his previous fund and original investors back in 2014 sitting on losses of more than 25 per cent, and many thousands who invested later suffering much bigger losses, there will be little sympathy for Woodford and the comments he made in his recent interview.

"While some investors may well agree with Woodford’s view that investors would have been better off if his fund was not forced to suspend and liquidate, others will simply be glad that they have got some of their money back after being stuck for many months.”

He adds that with the new venture, "it looks as if Woodford is looking for vindication that his original investment strategy was correct all along.

"While he has acknowledged that a fund for retail investors would look very different today to the one he previously ran, by focusing on professional investors, he clearly hopes that much of the emotion and fury that he has faced over the past two years will disappear.

"However, given the broader damage in trust and confidence that this whole affair has caused to the investment industry, it looks unlikely that investors of any kind will find it so easy to forget.”

David Thorpe is special projects editor for FTAdviser