Pauline Snelson and Fred Hiscock had planned for a comfortable retirement together, saving a little every month to build up a decent nest egg.
Pauline, 67, had run a patisserie in the Midlands before opening a bed-and-breakfast in the picturesque seaside town of Salcombe, Devon.
Fred, four years her senior, took early retirement from his job as a senior manager at Jaguar and invested his pension lump sum in property. By the mid-2010s they had saved enough to slow down.
Neil Woodford made his name by returning profits when others lost their shirts in the dotcom crash of 2000, repeating the trick in the 2008 global financial crisis
But then, prompted by Pauline’s financial adviser and their own research, they made one of the biggest mistakes of their lives: they entrusted £75,000 to Neil Woodford.
It’s hard to blame them. Woodford was the most celebrated British share-picker of his generation, a rock-star fund manager with a lifestyle to match.
For three decades, the savers of Middle Britain had entrusted him with their money and he had made them rich with blockbuster returns.
Woodford made his name by returning profits when others lost their shirts in the dotcom crash of 2000, repeating the trick in the 2008 global financial crisis.
But after he set up his own fund, the Midas touch deserted him, leaving 400,000 savers with their nest eggs smashed. In less than two years, Woodford Investment Management had gone from managing £18 billion to next to nothing.
It’s a story of greed, obstinate conviction, betrayal and misplaced loyalty, one that exposes the flaws of a timid regulator and an industry in thrall to its star performers.
His £6.4 million home in Salcombe, Devon, is pictured above. fter he set up his own fund, the Midas touch deserted him, leaving 400,000 savers with their nest eggs smashed
Above all, it reveals what happens when ordinary people hand their savings to financial advisers and fund managers. But this is not just about the direct victims.
Three-quarters of British households use fund management services – whether they know it or not. The Woodford scandal has crushed consumer confidence in one of Britain’s most important sectors, one critical to the financial security of its ageing population.
Was Woodford solely to blame or was he just one of many weak links in a chain that ultimately disintegrated into dust? How did his career collapse so spectacularly?
Was the hype surrounding him, to quote the then Bank of England governor Mark Carney, ‘built on a lie’? And what is the fate of Middle England’s money?
Neil Woodford’s ascent began with the Big Bang deregulation of the City in 1986. Until then, he had made steady but unspectacular progress in the financial world.
Yet as the City shed its old public- school image, his keen intelligence, bullish personality and fierce ambition proved marketable assets.
At grammar school in Maidenhead, Berkshire, Woodford had been an archetypal alpha male: academically bright and a gifted sportsman, representing the county in rugby and athletics.
While working for TSB Group in the mid-1980s, he began dating and then married the chief executive’s PA, Jo Mullan.
He then took a job with the fast-growing fund management company Perpetual. It seemed a perfect fit. Perpetual saw themselves as outsiders, which suited Woodford’s disdain for the cliquey, clubby City.
He helped run the company’s UK equities funds, with one concentrating on growth and another – managed by Woodford – seeking to maximise income for investors.
Mr Woodford is seen above eventing at the Tweseldown Horse Trials. Neil Woodford’s ascent began with the Big Bang deregulation of the City in 1986. Until then, he had made steady but unspectacular progress in the financial world
This straightforward approach boosted the company’s brand with the rise in popularity of tax-free investment accounts, Personal Equity Plans. Indeed, Perpetual soon became known as the ‘king of Peps’ and Woodford was its star performer.
Woodford’s investment model was simple. He identified industries he expected to do well over three to five years, and picked the best companies in the field.
‘The key to performance is often not so much what you have got, as what you have not got. It is important to miss the problem stocks,’ he would say.
This was advice he would later ignore.
One of Woodford’s favourite sectors was tobacco, which had become toxic to most investors. Another was pharmaceuticals, especially the largest players who paid generous dividends whatever the economic conditions.
The more Woodford waded into corporate deals and picked up media attention, the more he started to see himself as corporate Britain’s forceful puppet-master. Having shunned the booming telecoms and tech companies (believing them overpriced), when the dotcom bubble burst, Woodford’s funds swiftly made 15 per cent gains to rank second among its peer group.
After Perpetual was sold to the US company Amvescap, Woodford poured his new-found riches into status symbols, buying Ferraris, Porsches and huge properties, including a Grade II listed seven-bedroom home once owned by F1 tycoon Flavio Briatore. It had a wine cellar, walled garden, tennis court, croquet lawn and outdoor swimming pool with a pavilion changing room. Its ten acres also included a two-bedroom cottage that Woodford moved into when he left his wife for his secretary, Madelaine White.
With his domestic life in disarray, Woodford doubled down on his work and when the financial crisis hit in 2008, his losses were significantly less than in the wider market. He then became engaged in another scrap with an equally menacing foe. Jeremy Paxman, the then-presenter of BBC2’s Newsnight, was a neighbour in Hambleden Valley and complained to the council that a large equestrian centre for which Woodford had submitted a planning application was ‘unsightly and environmentally unfriendly’.
The objectors were successful, and Woodford was forced to scrap his plans.
This marked the beginning of the end of his time living in the Henley area. Having embarked on his new relationship with Madelaine, it was time for a fresh chapter in his domestic life.
One of Woodford’s colleagues at the time was the future Tory MP Andrea Leadsom, who was responsible for contract negotiations with fund managers.
The pay awards were incredibly generous, with bonuses that made most senior managers multi-millionaires. Woodford’s own deal was tailored to offer incentives based on sales: the more money that flowed into his funds, the more he made.
This was an unusual arrangement. Fund managers’ bonuses were typically tied to investment performance, which tied their interests with those of their investors. There were also fears that if funds grew too big, they would be difficult to manage.
Another member of staff heavily incentivised to keep funds ballooning was Craig Newman. Ten years younger than Woodford, there were two sides to his personality – the aggressive and abrasive manager who bullied and publicly shamed staff, and the obedient subordinate manager trusted to get the job done.
Woodford’s new home, a 1,000-acre estate in the Cotswolds, had several stable blocks for Madelaine’s eventing horses and provided an entree to England’s equine elite: the Queen’s granddaughter Zara Tindall, a former world three-day eventing champion, was a neighbour.
Meanwhile, Woodford was investing in science start-up companies.
Some of his investments were less than inspired. He handed over £252 million for 7.6 per cent of a company called Xyleco, founded by an eccentric octogenarian inventor in Massachusetts.
The deal valued the company, which consisted of nothing more than a stack of patents, at £3.3 billion. The investment eventually had to be written off.
He also committed $180 million for a 28 per cent stake in a US biotech company but then its shares plunged by 90 per cent.
But the epitome of his hare-brained investments was Industrial Heat, a North Carolina venture based on the holy grail of cold fusion (the process of creating nuclear fusion at room temperature in order to create power).
Woodford handed over £54 million of his clients’ savings. If ever there was a sign that he was developing a hero complex, this was it.
His new bosses in America were appalled. They went over Woodford’s head to set up a committee to assess all private investment.
If their bullish fund manager was already angry at what he felt was interference, this further stoked his rage. Increasingly, too, Woodford felt his team were riding on his coat-tails. A former colleague says: ‘Neil developed an aggression towards the business, a belief that there were certain actors working against him.’
But Woodford was not just the UK’s best-known fund manager – he was considered to be one of the most influential figures in British business. His private interventions and public outbursts could split boardrooms and break up companies.
Woodford even targeted politicians he felt were interfering unnecessarily in the industries in which he invested. For example, then Labour leader Ed Miliband was subjected to Woodford’s vitriol for proposing price caps on energy bills, which Woodford believed would deter investment.
As his personal brand grew, an ever larger army of savers entrusted him with their money.
To cap it all, he was made a Commander of the Order of the British Empire in recognition of his services to the economy.
Woodford’s two main funds were each bigger than £10 billion – eclipsing the size of many small countries’ economies.
When, in April 2013, Woodford told his American bosses he intended to leave the business, and take Newman with him, the news struck like a lightning bolt.
By the time they left Invesco Perpetual to set up Woodford Investment Management, the funds under his control had ballooned to £33 billion. They projected that assets in their new firm would reach £9.75 billion in the first year, rising to £17 billion within three years, with £46.7 million of profit.
This was phenomenally ambitious, but they knew a large proportion of Invesco clients would move their investments to Woodford.
The new fund would copy the successful formula, including investments in unlisted start-ups, which Woodford believed had untapped value. The pair promised to deliver long-term investment management and provide what Newman described as a ‘violent transparency’ policy to clients, both on fees and what stocks were being held.
By June 2015, when their new Equity Income fund celebrated its first anniversary, Woodford was being hailed by the BBC as ‘the man who can’t stop making money’. On the face of it, he had walloped the market with a 19.6 per cent return. But behind the impressive figures, several of Woodford’s long-term favourite shares were struggling while the profits were disproportionately provided by a handful of previously unknown businesses.
Either Woodford had a sixth sense for picking companies of the future, or the armchair investors were in for a very rude awakening.
To add to their public image of shaking up the investment industry, Newman and Woodford announced they were scrapping staff bonuses.
But company accounts revealed a different story. Woodford and Newman siphoned off a third of the firm’s £35.5 million profit in its second year. Woodford drew the lion’s share – £7.2 million – while Newman picked up £3.9 million.
In 2016, the main fund, Equity Income, returned just 3.2 per cent, compared to 16.8 per cent for the FTSE All-Share index.
The under-performance reflected the way Woodford managed the portfolio, selling holdings in large, stable companies to buy unquoted and small healthcare businesses.
By the end of the year, the share of conservative holdings halved to 25 per cent. The fund looked less like a basket of undervalued, profitable companies and more like a concentrated bet on risky healthcare businesses.
Furthermore, the investments in companies that were yet to float on the stock market were valued by the Woodford fund itself – a clear conflict of interest.
Newman was under pressure. His expletive-strewn outbursts became more frequent. Clients who raised questions would be shouted at. Junior staff felt vulnerable, while some women in the office were uncomfortable with the sexist language of some senior managers.
For example, Newman once said he had hired a female worker ‘because she had the best t**s’.
The two men ran the business as they wished, with dissenters pushed out. When one manager was found with pornography on his computer, a junior member of staff who reported the incident was sacked.
By now, Woodford was spending most of his downtime at his Cotswolds estate, retreating to his private office to devour economic papers and books on military history. Holidays were spent at his £6.4 million home overlooking the estuary in Salcombe – a property once described as a ‘Bond villain’s lair’. But even there, Woodford could not switch off, checking his portfolio throughout the day.
As clients who were concerned about the poor returns began to withdraw their money, Woodford was forced to shed the easier-to-sell holdings, typically in the largest listed companies.
This meant that the harder-to-sell unquoted portion became a larger slice of the pie – and the compliance team knew the regulator would intervene if it went over a ten per cent ceiling.
As 2017 drew to a close, the Equity Income fund was dangerously close to breaching that limit.
The most obvious escape route was to sell the unquoted stakes at whatever price could be achieved.
But Woodford resisted cheaply giving up on companies into which he had ploughed hundreds of millions of pounds.
An alternative was to get some of the unlisted companies to commit themselves to going public. A third option was to move the tricky-to-sell assets into other funds run by Woodford.
Woodford decided to shift stakes in unquoted companies to his other funds in exchange for cash injections. In the largest transaction, he switched £48.8 million of his stake in drug developer Benevolent AI to his separate Patient Capital fund.
The moves were not made public and it is far from clear they were in his clients’ best interest.
Other companies Woodford had invested in were encouraged to declare that they were about to float on the little-known Guernsey stock exchange.
All of these moves – meant to be a temporary fix – were within the letter of the law, if not the spirit. The fact is that the regulator, the Financial Conduct Authority (FCA), failed to pick up on several warning signs. For example, it did nothing when it learnt that Woodford had arranged complex schemes to wheedle his way around the ten per cent rule.
The docile watchdog was too ready to entrust corporate directors to carry out day-to-day oversight of investment funds, which meant it had little understanding about what was going on in the industry.
Meanwhile, in the first weeks of 2018, there were big losses in Purplebricks, the online estate agency in which Woodford owned a 30 per cent stake, and the roadside rescuer the AA, whose shares lost 30 per cent of their value in one day.
In February, the Equity Income fund breached the ten per cent limit of funds being invested in unlisted stocks for the first time, which brought it to the attention of the FCA.
Woodford rejigged the portfolio, but within weeks the fund had breached the limit again. He was forced to dump the most attractive of his unquoted holdings. But more bad news followed when Woodford’s flagship fund was ejected from the Investment Association’s UK Equity Income sector for failing to produce enough dividends – just 3.5 per cent, compared to 3.6 per cent for the FTSE All-Share index.
It was a humiliating blow.
Worse, a heavy investment in an Irish biotech company lost two-thirds of its value.
According to a former employee: ‘We expected a fatal run on the business – but it didn’t happen. We were lucky to see out 2018. But we were on borrowed time.’
Yet the increasingly precarious state did not prevent Woodford and Newman skimming off a further £36.5 million for themselves (£23.7 million for Woodford and £12.8 million for Newman) despite the company making only £33.7 million of profit. Newman also raided Woodford Investment Management’s coffers for a £3 million interest-free loan.
Investors continued to withdraw from the funds in droves, and suddenly the main fund’s top ten holdings – once a roll-call of the UK’s most dependable large companies – comprised a jumble of struggling businesses and obscure science start-ups. Selling such companies was near impossible.
Woodford had set himself a classic liquidity trap. His investment empire was crumbling. His funds were performing woefully and those who had invested from 2015 onwards were suffering particularly badly. Yet there was still one last payday for him and Newman.
In the year to March 2019, they scooped up another £13.8 million from the business – £9 million for Woodford and £4.8 million for Newman. They were intent on squeezing out every last drop.
The final straw came in May 2019 when Kent County Council’s pension fund asked for its £263 million stake back, forcing a suspension of Woodford Equity Income Fund and freezing the savings of 400,000 private investors.
As his portfolio collapsed, Woodford prepared a grovelling video apology to be put on his website.
He said: ‘I’m extremely sorry we’ve had to take this decision. All I can say is that this decision was motivated by your interests, our investors. When it is appropriate, we will reopen the fund so you can buy and sell as normal.’
But investors were still being charged a total of £65,000 a day in management fees.
Consumer rights advocates (and The Mail on Sunday) demanded that Woodford drop the charges. But he refused, arguing there were expenses involved in keeping the fund running. Also, Woodford Investment Management would have to bear the £10 million cost of winding up the fund.
In less than two years, Woodford Investment Management had gone from managing £18 billion to next to nothing, yet he and Newman had extracted about £90 million from the company.
Originally, Woodford’s fame had come from just three counter-intuitive bets – investing in unfashionable tobacco, refusing to buy tech stocks in the dotcom bubble and selling bank shares before the financial crisis. But dripping with hubris, his luck had run out.
For every winning start-up Woodford backed, there were a stack of duds. Like many others, Pauline Snelson, the bed-and-breakfast owner in Devon, has seen her retirement plans ruined by Woodford.
‘I’m 67 and completely p****d off,’ she says. ‘I can’t understand how he’s got away with it.’
What she and her partner Fred Hiscock find most galling is the daily reminder of the fortune Woodford amassed at their expense.
Just a few streets from their Devon B&B is the lavish holiday home Woodford bought for £6.4 million in cash in 2017. Since then he has added a huge yacht in the bay.
‘I pass it every day,’ Pauline says. ‘I only hope he gets his comeuppance in the end.’
© Owen Walker, 2021
Built On A Lie, by Owen Walker, is published by Penguin Business on March 4 at £20. To pre-order a copy for £17.60, including free UK delivery, go to mailshop.co.uk/books or call 020 3308 9193 before February 28.