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Woodford was an accident waiting to happen - watchdogs failed to take action

The rise and fall of Neil Woodford is a classic tale of greed and hubris - but investors should have known better

It was a classic case of greed and hubris followed by nemesis. Yet the nemesis was by no means confined to Neil Woodford, the one time star fund manager brought low by the recklessness of his own investment strategies. The victims among his once admiring army of followers are legion.

Those left trapped in his flagship Woodford Equity Income Fund after it was “gated” – preventing them from withdrawing their money – were estimated to have lost around a third of their money on average. That’s quite something for a fund which spanned one of the longest stock market bull runs in history.

The story of Woodford’s rise and fall has already been so well chronicled that it scarcely needs repeating. But the scandal is not just one of individual delusion, or of the losses suffered by thousands of investors, as is usually the case in such debacles; it also points to any number of regulatory failings.

The style of investment that Woodford applied should arguably never have been allowed in the first place in an open-ended fund where investors are allowed to trade in and out on a daily basis, much as they would if directly investing in the stock market. A supposedly liquid fund that invests in illiquid stocks is almost by definition an accident waiting to happen, particularly when run by someone with very limited experience of investing in early stage companies. Along the way repeated regulatory red flags were either ignored or not properly followed up.

Yet Woodford is also as much an object lesson in caveat emptor as in missed opportunity for regulatory intervention. Savers backed him not for his safety first approach, but precisely because he was a high-risk, high commitment investor. While a mere wage slave in his 25 years at Invesco, he’d achieved spectacular returns for his followers. Covetous of the huge management fees that can be derived from running your own show, he determined to strike out on his own.

Strongly promoted by big investment platforms such as Hargreaves Lansdown and St James’s Place, the money poured in, from institutions and retail investors alike, all looking for a continuation of that winning streak. Soon he and his employees were living high on the hog. With apparent abandon, clients’ money was piled into the myriad of technology and biotech start-ups that peppered the surrounds of his Oxford base. It might be said that his investors were as guilty of greed as he was. Certainly they should have understood the risks. In any case, less than two years into the launch, his luck was already running out.

As the underperformance got worse, Woodford became subject to the investment management equivalent of a bank run. To satisfy the growing wave of redemptions, Woodford would be forced to liquidate his better holdings, further concentrating the underperforming ones among the investors that remained. It became a standing joke that whenever a company you’d never previously heard of ran into trouble, you could virtually guarantee that Woodford would be a major shareholder.

He heavily backed the likes of Allied Minds, a confused grab-bag of technology intellectual property that has lost more than 90pc of its value, and Provident Financial, a doorstep lender which crashed on news of an investigation by City watchdogs. Many of Woodford’s bets on private companies such as the improbable “cold fusion” energy developer Industrial Heat were worse still.

Having Woodford on the share register became seen by chief executives as a positive liability, because sooner or later he would be a forced seller, and other investors knew it.

As the redemptions mounted, Woodford resorted to a number of cosmetic tricks to stay within FCA rules limiting the proportion of the fund that could be held in unquoted securities. Several of these companies were floated on the Guernsey stock exchange, where listing rules are less stringent. A sizeable chunk of the unquoted portfolio was also transferred to the fund’s sister Woodford Patient Capital investment trust, in return for a stake in the listed shares. But still no decisive action was taken to halt the unfolding tragedy.

Only after it became apparent that Woodford could not meet the demands of a major investor, a local authority pension fund, for its money back did trustees finally move to gate the fund. Even then Woodford was allowed to limp on, trying to manage his way out of the mess he had created while simultaneously and scandalously still drawing his full management fee.

You would have thought a debacle as destructive as this one would be a career-ending event, reputationally at least, if not by dint of the ongoing disciplinary proceedings, yet to reach a conclusion. You’d be amazed how often it is not. Shameless doesn’t begin to describe the world we these days live in. But I for one will not be making the same mistake again. Yes, embarrassingly, I too was one of the mugs who kept with the faith to the bitter end, and I’m meant to know about these things.