The Crazy Bear in Stadhampton, 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 stockpicker. By his side was Craig Newman, his ambitious business partner and minder. Giddy optimism filled the air. "Things got really out of control — people were absolutely hammered," says one person who was there.
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• Woodford: the fallout for investors
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 Investment Management was a resounding success.
In just three months, the company's founders had navigated the fiendish regulatory application process, gaining approval in near-record time.
Meanwhile, a handful of financial institutions, made rich by Woodford over two decades, agreed to move billions of pounds to the new venture. St James's Place, the popular wealth manager, chipped in £3.6 billion ($7.3b).
Having spent years battling colleagues and bosses at Invesco, Woodford and Newman were finally free to build their own business the way they wanted — away from restrictive compliance 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 driving his car around the car park. The police arrested Grant Wentzel, Woodford's head of trading, who had been behind the wheel. Wentzel, who declined to comment, was acquitted of the drink-driving charge.
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 £15b, after trapping hundreds of thousands 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 loyalty. It exposes the flaws of a timid regulator and an industry in thrall to its star performers. Over four months, the Financial Times interviewed dozens of Woodford's former colleagues, business contacts, clients and friends — and gained access to a trove of confidential documents — to build up a detailed picture of an investor who became a household 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 postcard printer.
After studying economics and agricultural economics at Exeter university, he began investing at Perpetual, an upstart fund management business in the genteel surroundings of Henley-on-Thames, in the late 1980s. It was here he established his reputation as a contrarian fund manager who took bold bets on unloved companies.
Some of his biggest calls paid off spectacularly — including avoiding technology companies during the dotcom 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, 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 £25,000 over 25 years. He was a favourite of the personal finance pages, eventually marshalling £33b of life savings for hundreds 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," says Andy Bell, founder of fund distributor AJ Bell, in which Woodford was an early investor.
His influence was on show in 2012 when, as the largest shareholder in FTSE 100 defence company BAE Systems, Woodford spoke out against its planned merger with EADS, the owner of Airbus. His intervention helped scupper the €35b ($61.2b) 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 executives based in Invesco's Atlanta headquarters viewed the UK office as a regional outpost within the global empire, whereas Woodford and his fellow Henley fund managers saw themselves as the superstars who had built up the business through their exceptional talents.
Invesco's American managers feared the UK division was too reliant on Woodford's personal brand and wanted to grow other products. Yet Woodford's bonuses were heavily skewed towards attracting more money into his fund.
While 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. The fund manager became embittered towards Invesco's leadership, whom he blamed for restricting the growth of his fund and crimping his bonus. "It was always 'the f**king Americans'," says one former friend.
Woodford's resentment eventually 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 coat-tails. He began to distance himself from them.
Rather than sitting on the same desk with his team and engaging in discussions about markets, Woodford ordered a glass office to be built where he could shut himself off, according to two former Invesco colleagues.
His anger frequently bubbled 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, Woodford began taking an interest in investing in small, private companies that offered opportunities for exponential growth. This was a big departure from the large unfavoured companies on which he had built his reputation.
But having more than £30b at his disposal, writing some large cheques to back a handful of moon-shot bets seemed a gamble worth taking.
One company that caught his eye was US biomass conversion group Xyleco, whose board included former US secretary of state George Shultz and former US energy secretary Steven Chu. In March 2012 Woodford agreed to invest US$252 million ($394.9m) in the company for a stake of less than 7 per cent, which valued the business at more than US$3.5b, according to documents seen by the Financial Times.
This was a staggering amount for a company that was little 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 Woodford from taking any more risky punts.
They created an internal committee to assess investments in private companies — which excluded the fund manager.
The UK watchdog, the Financial Conduct Authority, had also caught wind of 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 Woodford. The regulator began an investigation into the breaches.
Woodford was not the only Invesco employee who felt betrayed by the company's decision to promote other funds. Newman, who, as head of retail sales was responsible for selling Woodford funds, was also in line for a smaller bonus. Sensing Woodford's frustration with Invesco, 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.
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 Woodford at Invesco and estimates of fees the new company could extract out of them.
A Woodford spokesman says Newman denies any wrongdoing and resigned, adding that the terms of his departure were subject to a confidentiality agreement. Invesco says Newman resigned on May 31 2013 and it could not comment on any details of staff departures.
Newman threw his energy into the launch of the new investment company. But he needed 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 Investment Management were in motion.
The break away
When 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 group right up until his new venture launched.
Woodford and Newman, who despite a lack of senior management experience would become chief executive 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 had worked for Woodford during the FCA investigation. It was agreed the four of them would 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 regulator into Invesco rule breaches, which resulted in an £18.6m fine for the company days before the fund manager launched his new business. The FCA says it did not find any evidence to suspect or take action against individuals.
"Given there was no sanction against an individual, the FCA authorised Woodford in line with its standard processes."
Meanwhile in Newman's application 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 allegations of misconduct or malpractice in connection with any business activity", he responded "no".
Woodford Investment Management says Newman's form was completed properly with the benefit of legal advice and in accordance with his obligations.
Money flows in
By May 2014, Woodford Investment Management was up and running and money began to gush in.
Newman's "violent transparency" policy — a rare approach, later dismantled, that gave clients detailed access to investment information, including the funds' complete list of holdings — would be well received by investors and advisers, as would the business's clear fee structure.
Several large clients from Invesco followed Woodford to his new home in the Oxford business park, including more than £200m from the Kent county council pension fund.
Woodford's sales team expected to make more than £3m a year in fee income from the latter alone, out of total revenue of £15m from institutional 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 £5b — 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 clients. But despite there being hardly any new business, Newman soon lavished 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.
Newman and Woodford also treated themselves. Woodford bought himself a Ferrari and, as an added perk, the carmaker let him visit its private test track in Maranello, northern Italy, to try out the model. 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 partners, Hamilton and Smith were pushed out.
The new business was going to be a two-man show: Woodford and Newman.
In an echo of the problems at Invesco, Smith and Hamilton began challenging the way 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 central factor behind his subsequent downfall.
"This is not a f**king control environment, this is about giving Neil the freedom he did not have at Invesco," Newman 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, Newman would pace around blasting obscenities. "There was plenty of shouting, swearing, using every expletive, for an hour or two at a time," says a witness. All the while Woodford silently simmered, turning the bezel on his chunky designer watch.
The Hargreaves connection
For the next two years, 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 associated with the stockpicker, and their value soared.
Much of the money came from one source: Hargreaves Lansdown. Woodford had a longstanding relationship with Hargreaves, which acts as a middleman 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 founders, to become the dominant channel for consumers to buy investment products. Now it was a public company and entrenched in the FTSE 100.
Woodford's sales team and Hargreaves 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 Woodford 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' customers that he and his wife were investing and called the manager "remarkable".
The plan worked and thousands of savers opened accounts with Hargreaves to invest in Woodford's funds. Equity Income soon overtook Woodford's former main fund at Invesco, reaching £6.7b in July 2015. Around this time, 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 business 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 colleague.
"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 Woodford's eye was Industrial Heat, a North Carolina business that attempted to develop power sources based on ideas at the fringes of modern physics.
The company also attracted investment from Brad Pitt and Laurene Powell Jobs, Steve Jobs' widow, among others. But Woodford ploughed in significantly more than the other high-profile backers, investing £54m to own a quarter of the business.
Woodford also invested in dozens of technology and science start-ups from the surrounding Oxfordshire area, straying further and further from the large 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," says a rival fund manager. "He was doing something very different from that on which he had built his career, track record and reputation."
Having spent most of his career in Henley, Woodford had been cut off from the centre of the UK's fund management 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 regulations around them," says a former colleague. "He basically applied the same thinking 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 adds. "Every company that came in, he wanted to invest in."
Woodford expected investor cash to continue to pour in and assumed one day the total value of the private holdings would be a fraction of the overall portfolio. But unlike private equity firms that specialise in unlisted companies, Woodford made large bets without taking overall control of the companies, leaving himself with hard-to-sell positions in businesses he had little direct influence over. He was setting himself traps from which it would be hard to escape.
Move to the country
Outside of work, Woodford had remarried and begun taking a keen interest in horseriding, a passion of his new wife Madelaine. He had lived in the former home of Formula 1 magnate Flavio Briatore in Buckinghamshire until 2014, but fell out with neighbours including TV presenter Jeremy Paxman over his plans to build 28 stables and a dressage arena on the property.
The couple moved to a 423-hectare farm in the leafy Cotswolds countryside, an hour's drive from his Oxford office. The sprawling estate, surrounded by drystone walls and hedgerows, included several stable blocks and extensive indoor and outdoor training facilities for Woodford's growing collection of eventing horses.
The location provided the fund manager with an entrée to England's equine elite, with Zara Tindall, granddaughter of Queen Elizabeth and a former world and European three-day eventing champion, a neighbour. Tindall's farm is set on the 600-acre estate of her mother, Princess Anne, another former European equestrian champion and Olympian. Each August her Gatcombe Park estate hosts the Festival of British Eventing.
Woodford began to spend so much time on his horse that the company brought in phones with special recording 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 Smith and Hamilton. A succession of risk and compliance managers passed through the business in a company increasingly dominated by Newman.
The atmosphere became more boorish 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 the company's top 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 occasions because of how boozy and boisterous they could become.
The empire crumbles
Looking back, the summer of 2017 was the high point for Woodford Investment Management. The business had attracted £15b from investors — just under half the total Woodford had managed at Invesco. Investment performance had dropped off since the initial few months, but Woodford's cheerleaders at Hargreaves Lansdown, St James's Place and other well-known advisers were blasé, insisting his career had followed a pattern of eye-watering returns followed by leaner periods.
In an FT interview in late 2017, Woodford admitted he doubted his investment judgment daily. "You must never, as a fund manager, stick your head in the sand saying 'everybody go away, I'm right, I'm right, I'm right'. You've always got to expose yourself 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 sufficiently 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, Woodford and 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 Woodford and the remainder to Newman.
But the short-term underperformance soon started to look like longer-term decline. Throughout the second half of 2017 and into 2018 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. 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 Prothena, a US biomedical company that Woodford owned a third of, which was valued at US$1.5b. In April 2018 the business reported the failure of a major clinical trial and within an hour of the market opening, its share price had nosedived 70 per cent.
Woodford's fans, including Dampier and his colleagues at Hargreaves Lansdown, continued to insist the renowned stockpicker would come good again — but fewer investors were listening. Customers began demanding their money back in droves, and a succession of long-term clients — including Aviva Investors, Jupiter Asset Management and the Abu Dhabi Investment Authority — deserted Woodford.
In order to pay back fleeing investors, Woodford was forced to sell the easier-to-shift shares in large listed companies. 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 intervened. The regulator began asking Woodford's administrator to give it monthly updates on the portfolio and how easy it was to trade, known in the industry as its liquidity.
But unknown to the regulator, Woodford had hatched a plan to try to escape this self-imposed liquidity trap. He began to list his stakes in some private 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 panicky investors withdrawing £10m a day. The following morning the board of the Kent county council pension fund, one of Woodford's longest-standing clients, met and decided it had finally had enough.
But when it tried to recoup its £263m investment — then equal to 7 per cent of the fund — Woodford did not have the cash available to pay Kent back. The manager had no choice but to suspend the fund, locking in the hundreds of thousands of remaining investors indefinitely.
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 investors back daily as promised.
For four months, the hordes of investors 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 companies.
But by last weekend, the bank had received insufficient interest in about £150m of unlisted investments. Link decided the risk of the fund reopening and then being forced to suspend again was too great.
On Monday afternoon, it told Woodford and Newman during a meeting in the administrator's London offices that the game was up. It would remove Woodford as manager of the fund and liquidate its holdings.
Realising the business could not go on without its main source of fee income, Woodford made a bombshell announcement the following evening that he was closing the company, adding: "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.
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," says Jonathan Little, an investment industry veteran who has run several businesses.
For now Woodford and Newman are keeping a low profile. On Wednesday this week, the car park at their Oxfordshire headquarters, usually filled with Jaguars, Range Rovers and Woodford's Porsche Cayenne, was deserted. The employees 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 Archie Hall.
Written by: Owen Walker and Peter Smith
© Financial Times