Hedge funds have field day front-running the liquidation. 300,000 investors left twisting in the wind.
By Nick Corbishley, for WOLF STREET:
Neil Woodford, the manager of shuttered asset management fund, Woodford Equity Income fund, just had one heck of a black Friday. First came news that Link Fund Solutions, which manages the corporate governance of Mr Woodford’s investment vehicles, had slashed the valuation of cold fusion developer Industrial Heat, one of Woodford’s largest unquoted holdings, by around 40%, from £91.3 million to £55 million.
The move will shave 4.3% off the net asset value of the Woodford Patient Capital (WPCT) investment trust. Having plunged since the suspension of Woodford’s flagship Woodford Equity Income fund (WEI), shares in the trust dropped a further 5.5% on Friday to 41.5p and are now down 46% year to date. Industrial Heat is also held by WEI. Valued at £115 million at the end of December, that stake is now likely to be worth around £70 million, knocking around 1.4% off the fund’s value.
Then came the second blow: another big Woodford holding, British haulage company Eddie Stobart, announced that it was suspending trading in its shares and had fired its CEO after an accounting investigation had found the group’s profits had been overstated. Twenty-three percent of the company’s shares, already down 47% in the last year, belong to Woodford. As long as the shares remain suspended, there’s no way he’ll be able to sell them.
Since deciding to gate WEI on June 3, Woodford has been desperately trying to sell down the fund’s holdings of lightly traded micro-, small- and mid-cap stocks that made up 97% of its assets at the end of May. Small and mid-cap assets can often yield higher returns — between July 2009 and July 2019 the mid-cap dominated FTSE 250 index returned 67% more than the UK’s large-cap index, the FTSE 100 — but they’re also riskier and harder to sell in a hurry, especially if you’re holding a large stake.
Since suspending his flagship fund in early June, Woodford has raised at least £650 million by offloading listed assets held in his frozen flagship fund, according to research by Bloomberg. It’s a step in the right direction but it’s not nearly enough. And every step of the way, hedge funds are one step ahead, mercilessly shorting any listed stock before it’s sold.
A case in point is the litigation funding specialist Burford Capital, which was the second largest holding in Woodford’s gated flagship fund representing 5.8% of total assets at the end of April. Until the beginning of this month, Burford was one of the strongest performing stocks in Woodford’s portfolio, having soared in value more than tenfold in just five years. That was before Muddy Waters Research launched a full-frontal assault on the company’s financial status on Aug 7, since which time Burford has lost around half of its market cap — over £1 billion.
Muddy Waters said that Burford Capital “actively manipulates” its performance metrics and “greatly misleads investors.” It also criticized the company over the fact that its CFO was married to the CEO, a highly irregular situation that has since been remedied with the re-assignment of the CFO.
For its part, Burford accuses Muddy Waters of “illegal market manipulation,” claiming it was victim to “spoofing” and “layering” practices, which are used by sophisticated market players to artificially drive down share prices.
For Woodford, the rout in Burford’s shares has been particularly painful. His stake in the firm, worth £212 million less than a month ago, has since shrunk in value to barely £100 million.
Problems are also mounting for many of Woodford’s healthcare stocks, which account for 23% of his flagship fund. Woodford cut his teeth investing in large healthcare companies for the giant fund manager Invesco, but reinvented himself as a venture backer of early-stage life sciences start-ups when he founding his eponymous firm in 2014. Many of those firms are now struggling, with 16 of the 20 listed healthcare stocks he picked for WEI sharply down in value since the beginning of the year, according to analysis by the London Evening Standard.
- Nucana, a UK drugs developer backed by Woodford, is down 48%.
- Autolus Therapeutics has fallen nearly 70% this year since announcing a five-month delay in building a critical drug-testing facility.
- Verseon has plunged 90% after revealing plans to use blockchain technology to fund drug trials.
- Other healthcare stocks such as Circassia Pharmaceuticals, Mereo Biopharma, Prothena, Tissue Regenix and 4D Pharma are down between 20% and 60% so far this year.
Given such dismal results, it’s hardly surprisingly that Bestinvest’s twice yearly “Spot the Dog” report recently crowned Woodford’s troubled Equity Income fund as the UK’s worst-performing fund. When it comes to “dog funds,” Woodford Equity Income fund is “the worst performer of all … managing to turn £100 invested into £80 over the three years assessed,” said Jason Hollands, managing director at Bestinvest.
Since the suspension alone, two months ago, WEI has fallen by 11.2%, compared with a 1.5% gain on its benchmark index, the FTSE All Share Total Return, according to LINK. Woodford Investment Management attributed most of its under-performance in the last seven weeks to the share price decline of Burford Capital and Industrial Heat.
In a letter to investors, Link Fund Solutions assured that the latest target date for reopening Woodford Equity Income fund, early December, “remains achievable”. Woodford Investment says it is reinvesting more than 80% of the proceeds from the sales of WEI’s stakes in FTSE 100 companies, suggesting the fund’s strategy is moving toward liquid, quoted hi-cap stocks, as many investors originally thought was the case.
For the moment, such lofty promises are scant comfort for the more than 300,000 investors whose money is trapped in Woodford’s flagship fund. They know that if the suspension is lifted, what they receive will be less, probably a lot less, than what they put in. And for the time being, there’s no sign of light at the end of the tunnel. By Nick Corbishley, for WOLF STREET.
The exodus from funds with illiquid assets forces more funds to block redemptions. Read… Liquidity Crunch Mangles UK Equity & Real Estate Funds
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This foreshadows what will happen here to pension and retirement funds. Once the selling starts, I expect the pirates to show up.
don’t most of these guys usually float off with their OPM and start over, leaving someone else to clean up the mess.
or are they managing the upcoming evidence collection that will be used at their trials?
I said several months ago that, just as in 1929, the Fed might cease to prop up the market, because doing so would, given the amounts required, be a fascist corporatist coup.
Now even the banks agree (B of A most recently). This means the Fed has begun its 1929-style back off.
The system will collapse very shortly. You are warned.
How can it be Legal to stop Investors from withdrawing their Money from Woodford ? The London Stock Exchange Stinks., and tha FCA. It`s the Old Story of Insiders and Outsiders.
Most hedge funds, if not all, have a redemption provision called a gate which allows them to restrict redemptions for a period or limit the amount of a withdrawal.
This is why the investors must be ‘accredited’.
But it also can work out in favor of the investors (though that is unlikely to be the case here). Investors were scrambling to get out of Dr Michael Burry’s hedge fund at a loss, but he locked them in. As a result, they had the opportunity to earn a 439% profit during the GFC. (See: “The Big Short”.)
Not only is this a pretty good example of an intolerant & uninformed comment, it also seems to assume victimhood.
This is why uneducated, unsophisticated and unqualified (not enough investable assets) investors are excluded from these products.
Nick has been a good addition to the Wolf’s! He is on point when it comes to the UK/EU stuff…
And he is “…reinvesting more than 80% of the proceeds from the sales of WEI’s stakes in FTSE 100 companies…” now? With the markets hovering on a dive? Does that seem wise? It all really is just like a casino, including the punters.
My thought, too.
But fund manager performance is generally judged relative to market indices – making 10% wins no prizes when everyone else is making 20%, and vice versa.
I just hope he’s buying counter-cyclicals!
What I don’t quite get is Neil’s bias towards double-risk – research pharma is high-risk, and small/low-liquidity stocks are high-risk too. Together, this combination is ultra-risky.
Not a sector in which to put more than, maybe, 5% of a portfolio, I’d say.
I love Nick’s work, and this is a nice update on what can go badly wrong in a portfolio and all at once! (Cold fusion, really?).
This series of unfortunate financial events reads like a modernized “Count of Monte Cristo”, so much that one wonders if Woodford wronged someone who seeks revenge by destroying each and every one of his investments in turn?
That being said, I don’t think the numbers in the first two paragraphs are mutually consistent. If the valuation of Industrial Heat has been slashed from 91.3 to 55 million Pounds Sterling (paragraph 1), how can Woodford fund’s stake have fallen from 115 million to 70 million (paragraph 2)? That could be typical of the math used in Cold Fusion, but I wasn’t aware it had infected UK corporate finance as well?
@Wisdom Seeker, I always find your comments interesting, but your middle paragraph here is very thought-provocative.
This was a little confusing, but it involves two separate Woodford funds:
The first fund (paragraph 1) holds a stake whose valuation has plunged to £55 million.
The second fund (paragraph 2) holds a stake whose valuation has plunged to £70 million.
He must read Zero Hedge and saw those endless ‘fusion is the next big thing’ banners, clicked on one of them, had an epiphany, and decided to pour all cash into companies in that space.
He probably ‘clicked here to buy shares’ and charge half a billion dollars on his credit card.
Neil is a sophisticated investor. A genius. He deserves his 2 and 20!
Plus all the airmiles he got. Hmmm… could it be that he invested in fusion only FOR the air miles?
Industrial Heat LLC is actually worse than that. Much worse.
Industrial Heat has been licensing/buying a lot of, how can I put this, highly dubious technology, such as the modern version of the Philosopher’s Stone, E-Cat/LENR (Low Energy Nuclear Reactor).
At least cold fusion is based on a single experiment in the 80’s whose results were either a sophisticated practical joke or the result of faulty monitoring equipment, but the stuff Industrial Heat dabbles with is at the same level as the “free energy engines” UFO contactees dabbled with in the 50’s.
Maybe Neil Woodford can ask the Space Brothers for a ride in their flying saucer instead of wasting his time accumulating air miles?
Neil is an incredible visionary!!!!
If he can keep the fund gated for let’s say, another 50 years (which is when fusion is expected to be viable based on past expectations), he’ll be the next Michael Burry.
Apparently the Cold Fusion gig is owned by his brother. And he was only trying to help him out.
Why they don’t slash the valuation of Industrial Heat right down to Zero is a mystery to me.
First, the physics is not there. As Wolfgang Pauli would say. “It’s not even wrong”.
Second, those LENR inventors are ducking, waving and shifting their goalposts while actually never making even one working device to run their house with – pretty much like the “zero-point energy”-crowd did, before that scam grew stale.
Third, if someone actually had a working process, they go and patent it, only they can forget about making any royalties because this would be a game-changing patent and everyone will rip it off (including our own governments). Exactly like happened when RCA invented the printed circuit board, Texas Instruments invented the Integrated Circuit and many other “Too Big To Monopolise”-technologies.
Fourth, there is a lot of concentrated political power and capital bound up in Oil, Coal and Nuclear. If anyone actually has a working process, the incumbents will protect their power base and their investments by any means available: We overthrew the elected government of Iran and invaded Iraq over much lesser “threats” to the control of “our Oil”!
If I had a working fusion process, I’d buy puts on Oil, Coal and Nuclear, put the IP and the demonstrator into a non-profit foundation located in Switzerland, then splurge the whole thing on the Internet immediately.
Giving it away for free is the Only way to get out from under discovering a practical cold fusion process!
Which all means that the value of “could fusion” is immeasurable and yet the investors will get nothing (even if it actually worked).
Maybe cold fusion is supposed to get hype value like “block chain” or something, with the plan to burn cash like a silicon valley tech unicorn and still be worth billions.
The only way these “investments” makes some sense is if they are in fact a device to safely dispose of some of the money that the FED and other central banks are splurging ‘everywhere’ a 0.1%’er feels that their pocket is getting a bit tight from their untreated gambling addiction :)
The FED’s problem is that If any of that money-fountain should get into the grubby hands of any non-elite people, they will just waste it on necessities and then the ‘Inflation KPI’ will tick up and then interest rates must be raised and then Everyone Dies. Or Something. But it’s BAD.
The parade of hedge funds that are laggards is amazing. This fund stands out due to its spectacular losses, but there are dozens that have failed to keep up with the indexes, and yet people and institutions continue to throw money at them, thinking that we may be entering a “stock pickers market”. In a desperate pursuit of yield, they throw caution to the wind, and chase the previously hot performers. Cold fusion? Really? Any fool knows perpetual motion is where the real money is. I lost a big chunk of change to a commodity hedge fund in 2008, cashed out with a 50% loss, and started indexing, and will never let a guru manage my money again. I’m sure these investors will learn a similar expensive lesson.
I run my own hedge fund.
I am my own central bank.
Some trades I lose money. Some years I even lose money.
But I have 100% access to my money. 24/7.
Well… we all build our illusions!
Cold fusion? Now THERE is a red flag. The real researchers who have spent at least 10 plus billion over the last 40 years, much of it in the Soviet Union will settle for containable ‘hot fusion’
Anything can happen but this is a very well explored ore body by some of the world’s top guys. .
The ‘thinking’ from Sillicon Valley is that every problem is really easy if one just pours a fuck-ton of money over it (and set it all alight) and ‘Everything is New’ so not bothering with what has been done before and recreating ancient chariot wheels in the most complex and dysfunctional way possible is heavily promoted with good-think-words like ‘Innovation’ and ‘Disruptive’ by these great ‘Philosophers’ of our time!
London home prices have deflated YTD. Brexit may be done without a deal.
Accounting fraud is not going to make Britain great.
First go The Cold Fusion Stocks. then go The Perpetual Motion Stocks, then go Tesla and Netflix.
And then go the rest.
The “Light at the end of the Tunnel” is usually an oncoming freight train.
Cold fusion is a website development protocol for business applications. “Cold fusion developer.”
Whoops, Industrial Heat isn’t a web services firm, it really is/was an energy research firm. My apologies.
Porsches, horses… and £6m lair like a Bond villain: GUY ADAMS investigates Neil Woodford, the investment fund chief who has stopped savers from withdrawing their own cash
It seems today that the primary mantra of hedge fund managers and owners is “never give a sucker an even break.” Certainly works well for them anyway. After all, it’s just other people’s money.
For today’s investors their mantra should be to never trust anyone to handle their investments for them unless they want to get screwed.
LOL …. he invested in Cold Fusion!!!!
Damn, I think I missed my chance to sell someone a chance to buy back the London Bridge. Cold Fusion
I have to admit I was a very ardent supporter of Woodford until the bitter end . Very disappointing management and I suspect this will eventually lead to some sort of legal action because he clearly misrepresented the fund.
That being said I do wonder whether the views that “the end is nigh” are a tad bit overdone. Isn’t the U.K. by a number of metrics like the worlds cheapest developed world stock market? Yield on the FTSE 100 is like 4.8% and will probably crack 5% when boris Johnson makes a pigs ear of brexit
My view is to absolutely max out investment in Vanguards Lifestrategy fund alongside ftse 100, and ftse 250.
The fund management industry is broken
Isn’t the U.K. by a number of metrics like the worlds cheapest developed world stock market?
Yes, but, people investing “long term” from USD got thoroughly reamed on the 18% drop in currency. For them, the UK is looking a lot more like Argentina or Mexico right now. High yields, cheap stocks, crazy politics, the “only” downside being that the investment one is riding on can be shot from under ones bottom at a moments notice.
I would give it a while after whenever Brexit officially happens for Brexit to take effect. There are lots of interconnected systems and businesses still to fail after the official Brexit event and years of negotiating trade treaties; assuming they don’t put the likes of Chris Grayling on the job and totally stuff it up, like they have been doing so far.
Maybe on the next leg up, any day now, I would get some leveraged ETF’s betting on the DAXX going down for when Boris does stuff up Brexit.
With all the (understandable) focus on “Brexit”, there’s another point that seldom gets mentioned.
It’s the gigantic scale of UK financial exposure.
Total financial assets – a good measure of exposure – are put at 11.3x GDP, though the latter number itself seems somewhat iffy.
This is a higher multiple than when Cyprus went under. Ignoring special cases like the Cayman Islands, the only country of any size with a higher ratio than the UK is Ireland (incidentally, likely to be a proportionately worse loser than Britain if “Brexit” turns out badly) .
In good times, this sort of exposure makes money. But, given where global financial risk seems to be right now, the UK could pay a huge price for its over-exposure.
“Patient Capital Trust” transforms into “Extremely Patient Capital Trust”….