Industry dissects the many unknowns of Neil Woodford’s comeback

“Astonishing”, “a grave insult to investors”, “everything about it smells wrong”. These are just a few of the choice phrases used to describe Neil Woodford’s shocking comeback to in­vestment management.

Once dubbed the ‘Oracle of Oxford’ but now known as one of the UK’s most infa­mous fund managers, Woodford grabbed headlines once again when he revealed to The Telegraph plans to launch a new invest­ment business – WCM Partners.

In a “tearful and defiant” interview, his first since the collapse of Woodford In­vestment Management in October 2019, the fallen star manager told investors he was “very sorry” for two years of under­performance and lashed out at authorised corporate director Link Fund Solutions for prematurely pulling the plug on the Woodford Equity Income Fund.

His mea culpa comeback announce­ment has not gone down well. Investors in his former fund, now renamed LF Equity Income, are still waiting for their money back with some having lost their entire life savings. And there are calls for Woodford to be barred from managing money while the Financial Conduct Authority (FCA) investigates the collapse of his fund.

This is not the manager’s first attempt to stage a comeback. In December 2019, while the liquidation of his fund was just underway and his funds business had been in the ground for barely two months, Woodford and his right-hand man Craig Newman were reportedly in China, hav­ing exploratory meetings with investors interested in early-stage companies.

Last March, as the Covid crisis began wreaking havoc across the globe, there he was again, attempting to buy back a bundle of biotech holdings from his for­mer fund at a discounted price of £500m. Many of the assets Woodford had been eyeing, including Oxford Nanopore, were among the 19 stocks sold to Acacia Re­search last June at an even bigger discount of £224m.

Twisting the knife further, Woodford revealed to The Telegraph he had been ad­vising the California-based investor on the portfolio since the summer when it swiftly flipped several stakes days after acquiring them for huge profits.

The remaining stocks will form “the cornerstone” of a new strategy to rebuild Woodford’s investment operation, accord­ing to a press release uploaded to the WCM Partners website on Valentine’s Day.

Like so many starstruck retail inves­tors, who for decades revered Woodford as the UK’s answer to Warren Buffett, his new business partner Acacia chief execu­tive Clifford Press seems equally in awe of his investment chops.

“I can tell you, in the course of my in­vestment career I’ve met a few of the re­ally legendary investors, and when I met Neil, I knew I was standing in the pres­ence of a truly exceptional investment manager,” Press gushed in a statement ac­companying the press release.

Brand taint will limit ability to sell to institutions

At this stage there are still many unknowns, including whether Wood­ford himself will even be managing mon­ey. The press release announcing WCM Partners’ launch lists him as the CIO, but Woodford does not appear on any compa­ny documents, nor is he listed as a regis­tered person on Companies House.

The business, which will be based in Jersey but have a lavish main office in a Buckinghamshire mansion, which was once home to King George II, has not applied for permission to operate with ei­ther the FCA or the Jersey Financial Ser­vices Commission.

“I’m not entirely surprised he is back,” says Boring Money CEO Holly Mackay, who believes Woodford’s return is proof he has “rhino skin”.

“However, he’s going to play in an insti­tutional world and if institutions think he can deliver alpha, some of them will buy into him,” she says. “I would imagine the brand taint will mean his ability to sell will be limited to institutions who are several steps removed from any retail investor.”

While Woodford is not targeting re­tail investors this time, Candid Financial Advice director Justin Modray says it will reflect badly on the industry if the manager is allowed to bounce back so soon, especially before the FCA in­vestigation into LF Equity Income has concluded and the liquidation of the fund is complete.

“Even assuming Woodford obtains the required regulatory permissions, which looks far from certain, I think relaunch­ing his career will prove a very tough sell,” Modray says.

“He’s wise to steer clear of the retail market, where I suspect his reputation will never recover. Investors will struggle to forgive the manner in which they lost money, especially since Woodford contin­ued collecting millions in fees while the ailing fund was suspended. Whether insti­tutional investors are more forgiving re­mains to be seen, but I am doubtful.”

There’s more riding on Woodford’s re­turn than whether he can rally institu­tional investors to his side and rebuild his empire from out of the ashes. There’s also a point to prove about his stockpick­ing prowess: that he was right to invest in these risky, fledgling healthcare compa­nies all along.

“Throughout this whole thing, he ac­knowledges the issues regarding the per­formance of the fund, but disagreed with Link’s decision to suspend the fund, to remove him and wind it up. And he con­tinues to this day to think that was a mis­take,” says Willis Owen’s head of personal investing Adrian Lowcock.

“If he can prove he did actually have the right skills to do this, then he can ef­fectively say, ‘It wasn’t my decision to wind up the fund, remember that’. So, there is arguably a point to prove here.”

Woodford still pushing biotech start-ups

Woodford still contends that the handful of biotech start-ups he saw potential in years ago will come through.

In a statement accompany­ing the WCM Partners launch, he said: “These stocks have demonstrated the huge poten­tial in the tech and biotech sectors where early stage, patient invest­ment can deliver outstanding value. I am focusing my energies on identifying value and providing that support.”

Several of Woodford’s early-stage health­care buys have enjoyed a startling rever­sal of fortunes during the pandemic. Syn­airgen, which is developing an inhalant Covid-19 drug, saw its share price soar 550% one month after Link sold it to Acacia on the cheap. Another holding Kymab, which was also included in the Acacia deal, was recent­ly snapped up by French pharmaceuticals giant Sanofi for $1.5bn (£1.09bn).

But for every success story there seem to be just as many duds. Tissue Regenix shares are worth less than a dollar, while MereoBiopharma, which was also sold to Acacia, is up around $4 a pop.

One of his unlisted favourites Ruther­ford Health is still hitting up investors for funding, requesting another £30-£40m in January, despite Woodford pumping in millions of pounds over the years.

And it’s unclear whether his other big unquoted bets like Oxford Nanopore, Be­nevolent AI and Immunocore look set to be revalued upward.

Lowcock seems unconvinced by Wood­ford’s track record in this area. He says the contrarian manager was always bet­ter at making sector bets, like his call on tobacco at the turn of the millennium or his avoidance of the banks in the lead up to the financial crisis, rather than picking winning stocks.

“There are fund managers who are more experienced and already in place who do private equity or biotech,” he says. “Wood­ford made his reputation on equity income stocks. There’s a huge difference between buying Imperial Brands or BAT and buying start-up biotech companies.”

But poor performance wasn’t Wood­ford’s undoing; the fund’s liquidity issues were the final nail in the coffin, which is why his apology feels tone deaf.

As the listed investments in Wood­ford’s flagship fund underperformed, his lengthy tail of unquoted positions became a larger portion of the portfolio, putting him in danger of breaching the Ucits 10% limit on unquoted companies.

The yes men

Ultimately, this boils down to an issue of risk management or lack thereof. The fact that many of the same ‘yes men and women’ who let his unquoted exposure go unchecked, have returned to his side to launch WCM Partners is concerning.

In addition to Woodford IM’s former chief executive Newman, COO Paul Green is also back, alongside ex-Woodford IM head of digital and technology Jon Adair and relationship manager Kristian Pentti­la, according to LinkedIn. All four were at Woodford IM at its genesis in 2014, having spent decades working with him at Inves­co. Head of HR Yvonne Pownall and in­vestment analyst Alex Staples, who spent two years at Woodford’s failed boutique, have also cropped up at the new venture.

The only apparent newcomer is former RBS man Gavin Petken, who is listed as a director at WCM Partners.

“In the regulated space, this doesn’t improve the case for Mr Woodford,” says City Hive CEO and founder Bev Shah. “Surrounding yourself with the same peo­ple increases the risk of ending up with the same outcomes.”

Mackay isn’t entirely surprised a hand­ful of staff have resurfaced at Woodford’s latest venture. “No-one likes being taint­ed by association,” she says. “I’d imagine some see him as a victim of the media and a victim of an administrator who suc­cumbed to the court of popular opinion.

“Does it raise red flags? I think the in­terview process for his new head of com­pliance will be an interesting one.”

Link expected in court before summer

Eighteen months on from the collapse of LF Equity Income and the FCA has yet to publish any findings from its investiga­tion or held anyone to account.

Meanwhile, a handful of litigators have been seeking to recoup money for inves­tors who were burned by Woodford’s fund.

Harcus Parker, which claims to be the farthest along in the process, is hoping to bring the fund’s authorised corporate di­rector Link to court before the summer. In July, the firm sent Link a pre-action letter, which is required to trigger the litigation process.

Earlier this month, rival law firm Leigh Day also sent its letter before action on behalf of its clients to Link, which it says could see the ACD taken to the High Court in a matter of months.

Harcus Parker senior associate Dan Kerrigan says the fact Woodford is publicly blaming Link for the fallout of his equity income fund, which at its peak held £10.2bn, is awk­ward. “He’s obviously pointing the finger at Link and so are we,” Kerrigan says.

See also: Hargreaves looks set to dodge a bullet as litigators home in on Link over Woodford collapse

Though Kerrigan understands inves­tors’ frustrations at watching Woodford revive his career while they are stomach­ing huge losses, some as high as 50%, be­cause of the way the regulations are set up Link is the party at fault.

“The responsibility for what the invest­ment manager did and for ensuring that it was consistent with the stated aims of the fund lies with Link,” Kerrigan says.

“You could make an argument that in a proper functioning system, the invest­ment manager could have proposed in­vestment in precisely the same compa­nies, but you would’ve got a completely different outcome because Link would have constrained the decisions he was making – and it would have pushed him in a different direction for this fund.”

This article first appeared in the March 2021 issue of Portfolio Adviser magazine.