A forensic analysis of the Woodford Fund Disaster

1. What Went Wrong at Woodford
A forensic investigation of the
Woodford Equity Income Fund History

2. Who is this for?
2. Stock Market Investors - seeking to avoid
common Portfolio Selection Mistakes.
1. Fund Investors especially those who
invested in Woodford Capital Funds.
3. Advisors/Professionals seeking answers
to how to avoid these situations in future.

3. 1. History - Perpetual Years & Woodford Capital Launch
2. Our Analysis Framework
3. Holdings Analysis
• 2014 - analysis of the first published holdings
• 2015 - What holdings drove performance?
• 2016-2017 - Analysis of the fund to the peak
• 2018-2019 - Analysis of the downfall and closure
4. Charts over the full timeframe - 2014-2019
5. Lessons for Investors
6. Analysing your own Portfolio to avoid the same mistakes
7. Q&A
Agenda

4. Ed Page Croft, CFA
Co-Founder & CEO Stockopedia.com
Oxford Scholar, ex-Goldman Sachs Private Clients.

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Please note that all data in this document is historic and dated when this document went to print: 1st November 2019.
Disclaimer

6. The Perpetual Years 1988-2014

7. https://www.telegraph.co.uk/finance/personalfinance/investing/10388817/How-Neil-Woodford-made-you-a-fortune.html
Woodford’s Career to 2014

8. 2012 - A sign of things to come?
•Woodford invests $252 million in speculative US
biomass conversion group Xyleco.
•Invesco’s US HQ unhappy. Takes steps to prevent
Woodford from making more risky bets.
•Sets up an internal committee to assess
investments in private companies.
Two years later, Woodford leaves Invesco.

9. Patrick Connolly
Head of Communications, Chase de Vere
“It will be impossible for Invesco
Perpetual to replace Woodford with
somebody of similar standing
because, particularly in the world of
UK equity income funds, there is
nobody of similar standing.”

10. Woodford Capital - 2014-2018

11. 2014 - Woodford goes it alone…

15. WHY?

16. Analysing the Fund
Explaining our framework for analysis

17. • Woodford Capital
• Funds Library
• Wayback Machine
• Telegraph
• CF Woodford Annual Reports
• LF Woodford Annual Reports
Sourcing the Holdings History

18. Stockopedia’s share analysis database
1 - Our primary data source, Refinitiv (Thomson Reuters),
employs thousands of analysts who scan, audit & standardise
financial data entry into their databases before uploading to their
financial cloud.
2 - Every day and night we download financial statements, analyst
estimate data, price quotes & histories and other company
information to our databases.
3 - Our analyst & developer team organise and clean the data, and our
servers crunch over 60 million computations daily to build up a
library of more than 2000 essential, accurate and timely statistics
on every stock. From simple PE Ratios to Piotroski F-Scores.
4 - We then rank and screen the market to filter the wheat from the
chaff and publish the data on our StockReports and in our Screening
Database.

20. StockRanks

21. StockRanks
Every stock in the market ranked
against all the others for three
proven, historical drivers of return.
StockRanks
Quality
Value
Momentum
StockRank TM
26
10
85
31
26
10
85

22. Annualised Performance of StockRank
(Quality, Value & Momentum in UK Stocks)
* Based on quarterly rebalanced portfolios of >£10m market capitalisation LSE listed stocks split into deciles according to StockRank since 2013.

23. > 90 StockRank
+139%
< 10 StockRank
-62%
* Based on quarterly rebalanced portfolios of >£10m market capitalisation LSE listed stocks split into deciles according to StockRank since 2013.
Annualised Performance of StockRank
(Quality, Value & Momentum in UK Stocks)

24. Classifications

25. Sector

26. RiskRating

27. Size Group

28. Style

29. Sectors
A 10 level classification based on
every stock’s economic sector*.
Sector
Basic Materials
Consumer Cyclical
Financials
Consumer Defensive
Healthcare
Utilities
Industrials
Energy
Telecoms
Technology
* TRBC Schema

30. RiskRating
A 5 level classification based on a
every stock’s annual volatility.
1. Conservative
2. Balanced
3. Adventurous
4. Speculative
5. Highly Speculative
Low Risk
High Risk
NB - Risk is defined as upside
and downside risk, rather than
the pure risk of capital loss.
RiskRating

31. RiskRating Returns
* Based on annually rebalanced portfolios of >£10m market capitalisation LSE listed stocks split into buckets according to RiskRating since 2013.

32. Size Group
A 4 level classification based on
Market Capitalisation Bands.
Large Cap
Greater than £2.5bn Mkt Cap
Mid Cap
Between £350m and £2.5bn
Small Cap
Between £50m and £350m
Micro Cap
Less than £50m Mkt Cap
Size Group

33. StockRank Styles
A 9 level hierarchy based on
various StockRank Combinations.
4 Winning Styles
• Super Stock
• High Flyer
• Turnaround
• Contrarian
1 Unclassified
• Style Neutral
4 Losing Styles
• Value Trap
• Momentum Trap
• Falling Star
• Sucker Stock
Historically
Outperformed
Historically
Underperformed
Style

34. 4 Winning Styles The stock is strong in
at least 2 of 3 Ranks
The stock is weak in
at least 2 of 3 Ranks4 Losing Styles
Style Classifications

35. Woodford’s 2014 Portfolio

36. Neil Woodford, May 2014
“I believe I can find enough
safe, reliable, attractively
valued companies to build a
portfolio which, in aggregate,
can deliver an attractive long-
term risk-adjusted return.”
“Slow Growth Strategy” - WoodfordCapital.com May 2014

37. Woodford went public
with their July 2014
Holdings. It was an
unprecedented move
and hugely
transparent. The top
holdings + weights are
listed on the right.
2014
* Top Holdings - July 2014

38. 2014
Woodford
immediately invested
his fund as one would
expect a man of his
track record to do. He
bought generally
good value, higher
quality names.
The few speculative
investments (bottom
left) were in the
minority, as should be
the case in a fund
with so many retirees
looking for solid
income in preference
to growth.

39. 2014
A basic analysis of the
portfolio at the time
using the Stockopedia
StockRanks - showed
that the fund was
focused on Quality,
with average Value
and a slight tilt towards
Momentum.
The few speculative
names held dragged
down the relative Value
of the portfolio, but
given its constituents it
was not a serious
concern.
High Exposure to Quality Stocks

40. 2014 Heavily invested in large caps

41. Mark Dampier Hargreaves Lansdowne
“I’ve known Neil for over 20 years and
I’ve been invested in him over most of
that time, he’s never particularly let me
down and he’s a very non-benchmark
manager which is exactly what I want -
otherwise you might as well go passive.”
Why Woodford Equity Income is my Favourite Fund - FE Trustnet

42. 2014 - Diversification

43. 2014
Almost 24% of the
portfolio was allocated
to low risk, large cap,
dividend paying
healthcare stocks -
Astrazeneca,
GlaxoSmithkline,
Roche, Sanofi and
Novartis.
Woodford’s attraction
to this sector was
primarily in
conservative stocks at
this stage…. but it
would sow the seed for
things to come.
24% Large Cap Healthcare

44. Neil Woodford, Dec 2014
“We have... invested a small portion of
the fund’s assets in several early-stage
businesses, some of which are quoted,
some unquoted. This part of the market
is unloved & undervalued and,
consequently, I believe it represents an
area of huge untapped potential.”
“Quote, UnQuote” - WoodfordCapital.com December 2014

45. 2014
The fund was invested
fairly conservatively.
More than 50% of the
portfolio was in the low
risk shares, i.e. those
that have a less than
25% annual volatility.
Less than 20% of the
portfolio was invested
in Speculative and
Highly Speculative
names.
* Position Weighted Allocations.
RiskRatings Diversification

46. 2014
The fund was invested
fairly conservatively.
More than 50% of the
portfolio was in the low
risk shares, i.e. those
that have a less than
25% annual volatility.
Less than 20% of the
portfolio was invested
in Speculative and
Highly Speculative
names.
RiskRatings vs FTSE All Share

47. 2015

48. BBC News
“This weekend, hundreds of thousands of small
investors - many of them pensioners - will be
saluting Britain's very own Warren Buffett.
Since he launched his own fund exactly a year
ago, Neil Woodford has delighted investors with
an 18% return on their cash.”
Brian Milligan - Personal Finance Reporter - BBC News - June 2015

49. On strong initial
performance &
effective platform
driven marketing,
Woodford Capital
was seeing
unprecedented
inflows of capital.
Most was going into
the Woodford Equity
Income Fund.
2015
* Source Morningstar.

50. Neil Woodford
“The pharmaceuticals sector… still looks
very attractive in my view… but the
opportunity does not exist only amongst
large, mature companies such as
AstraZeneca and GlaxoSmithKline. We
are also very excited by the long-term
potential in smaller, earlier-stage UK
pharma businesses.”
“British Science, Great Shape” - WoodfordCapital.com - 2015

51. 2015 Top 5 Contributors to Performance
Stock Sector % Return Contribution RiskRating* Quality* Value* Momentum*
Stratified
Medical
(Unlisted)
Healthcare 490% 2.9%
Highly
Speculative
n/a n/a n/a
Prothena Healthcare 249% 2.3%
Highly
Speculative
35 17 30
Imperial
Tobacco
Consumer
Defensive
33% 2.2% Conservative 94 67 77
Reynolds
American
Consumer
Defensive
56% 1.7% Conservative 71 50 93
BT Telecoms 21% 1.0% Balanced 54 76 97
* StockRank & Ratings information Stockopedia.com as of Jan 1st 2015. Top 5 Performance FE Trustnet.
2 Highly Speculative Healthcare Winners - a lucky draw?

52. 2016 Portfolio

53. By 2016 Woodford
had become focused
on early stage
healthcare,
healthcare tech and
financial stocks.
This created a
significant shift in his
portfolio allocations.
Less Quality, More
Momentum.
2016
* Top Holdings - June 2016

54. 2016
Woodford had sold
many of his high
Quality names in
favour of a set of
increasingly
speculative stocks.
The chart on the
right only includes
listed equities, but
Woodford had
begun to hold
dozens of unlisted
equities too…
increasing his
exposure to the
highlighted area.

55. Woodford had
made such a
profound shift in his
allocations, that the
portfolio no longer
resembled the
Quality/Value Style
in which he’d made
his name.
It was a shift
towards
Momentum as
primary return
driver. It would
prove to be a
Momentum Trap.
2016

56. Woodford’s
preference for early
stage Healthcare
ventures was
becoming an
obsession. The
allocation towards
this sector reached
more than 40% of
the portfolio.
This was making
the portfolio
resemble a single
sector bet.
2016

57. 2016
The fund had shifted
dramatically in Risk
allocation since 2014.
Speculative & Unlisted
Investments had grown
to more than 35% of
the fund, while
Conservative
investments had
halved.
The Fund had shifted
dramatically away from
the kind of ‘safe,
reliable’ stocks that
Woodford originally
stated he wished to
buy.
RiskRatings Diversification

58. 2016 Case Study
Northwest Biotherapeutics

59. Jason Hollands
“Investors in the Woodford Equity Income
fund might reasonably be asking why on
earth a UK fund, which is described as
‘offering exposure to companies that can
deliver sustainable dividend growth’, has
an illiquid holding in a US biotech stock
that has never paid a dividend.”
Managing Director, Communications, Tilney BestInvest

60. -99%
$180m invested
in 2014
“shorting attack -
allegations of
financial
improprieties and
regulatory failure”
Sold for 24c
in 2019

61. A Speculative, Healthcare, Momentum Fund?
What did investors sign up for?
A High Quality, Safe, Income Fund.
or…
35%
Speculative & Unlisted
Stocks
40%
Healthcare Stocks
62/100
Momentum Rank

62. 2017

63. By mid 2017, the
fund was massively
committed to
speculative, and
unlisted securities.
It was at this point
that performance
suffered and
investors got the
jitters. Outflows
began.
2017
* Top Holdings - June 2017

64. * Source Morningstar.

65. 2017
Using the StockRanks
again, we can see the
state of the fund.
At its zenith, right at its
maximum AUM, the
Woodford Equity
Income Fund was
highly exposed to the
Momentum Factor.
The firm’s approach
had, empirically
speaking, shifted
steadily away from the
discipline of Quality
first.

67. John Chatfield-Roberts
“We had lost confidence with what was
happening with the fund. When we had
started there were six unquoteds in the
fund and by the time we'd sold there were
45… if he had worked at Jupiter it just
wouldn't have happened.”
Head of Strategy, Independent Funds - Jupiter Asset Management

68. 2017 Case Studies
PurpleBricks & Burford Capital

69. Woodford Capital
“Among the positive performers were Burford
Capital and Purplebricks. These are both
young, dynamic businesses that are proving
highly disruptive in their respective industries.…
We are confident that both companies can
continue to grow rapidly in the years ahead and,
in the context of this growth, their shares
continue to look profoundly undervalued.”
“2017 Year In Review” - WoodfordCapital.com - 2017

70. -72% Since
“Profoundly
Undervalued” “Unproven business
model and hasty
expansion led to
huge cash
consumption and
subsequent capital
raisings.”

71. -33% Since
“Profoundly
Undervalued” “28% stake, but
shorting attack and
allegations of
financial
improprieties hit
share price.”

72. 2018

73. As outflows gathered
apace, there was
nowhere to hide.
Woodford sold most
of their liquid, safe
stocks to meet
redemptions,
accentuating the risk &
illiquidity profile of his
fund.
The fund was in a
classic liquidity trap.
2018
* Top Holdings - Dec 2018

74. Woodford was
dealing with cash
outflows. They had
to sell something to
pay for redemptions.
Large numbers of his
favourite, Defensive
& Healthcare Large
Caps had to go.
But selling all the
liquid safe stocks
meant something
worse…
2018

75. 2018
The forced selling of
safe liquid shares had
actually vastly
increased the risk
profile of the fund. The
fund became
completely full of the
shares Woodford
couldn’t sell due to
lack of liquidity. i.e. the
Unlisted and
Speculative shares.
Growing speculative profile

76. 2018 A minority invested in large caps
Through this
extraordinary turn of
events, by the end of
2018 the Woodford
Equity Income Fund
held only 22% of the
portfolio in Large Cap
stocks with a market
capitalisation of £2.5bn
or more.
The forced selling had
radically changed the
profile of the fund from
2014 when 76% of the
fund was in Large
Caps.

77. This chart shows the
performance of the
2016 holdings until the
date the fund closed.
Red lines show fully
sold positions by end
2018.
Not only does it
illustrate how many
losers there were in the
portfolio, but how much
Woodford was forced
to sell their winners.
They were the only
stocks with enough
liquidity to sell.
2016-2019
* Equity Performance calculated between 31st December 2016 and 16th October 2019 excluding dividends.

78. Peter Lynch
“Selling your winners and
holding your losers is like
cutting the flowers and watering
the weeds.”
Fidelity Magellan Fund Manager - Author of “One Up on Wall Street”

79. 2016-2019
It’s useful to analyse
the ‘hit rate’ of
Woodford’s quoted
stock selections in the
2016 portfolio. While
the FTSE All Share
didn’t go very far in this
time window, 51% of
shares were winners.
Woodford’s portfolio of
picks generated 72%
losers. Less than one
in three managed to
rise in price over this
time period.
It’s a poor performance
for such a tenured
stock picker. * 31st December 2016 WEIF Holdings performance to 16th October 2019

80. 2018 Case Study
AstraZeneca

81. Woodford Capital - 2018
“Not a great deal has changed as far
as the investment case for
AstraZeneca is concerned. But a lot
of other stocks have become
increasingly attractive from a
valuation perspective.”
Investor Update - WoodfordCapital.com - 2018

82. +70% Since
“Not a great deal has
changed [in] the
investment case”

83. 2019

84. Hargreaves Lansdown
“This is not the first time in his career that
Woodford has underperformed the market
but we have stuck with him through difficult
times in the past and investors have been
rewarded for their patience.
We retain our conviction in him to deliver
excellent long-term performance and the
fund remains on the Wealth 50.”
“A Step in the Right Direction” - Richard Troue - May 2019 - One month before fund closed.

85. By mid 2019,
Woodford had made a
shift to restructuring
his portfolio towards
less volatile but
cyclical, value stocks.
While it was a more
conservative play… it
couldn’t stop the fund
being gated.
2019
* Top Holdings - Jun 2019

86. 2019
Woodford’s biggest
purchases in the
first half of 2019
were all among the
highest quality,
best value stocks
he’d owned in the
history of the fund.
Not only that, but
they were proper
blue chips. It was
a last dash attempt
to get back to a
sane portfolio
construction.

87. This sector shift was
dramatic. It was a
shift away from
defensive stocks
towards cyclical
stocks.
2016-2019

88. 2019
A basic analysis of the
portfolio at the time
using the Stockopedia
StockRanks - showed
that the fund had now
shifted dramatically
away from Momentum
to Value.
This is partially to be
expected by the
collapse in his illiquid
Momentum portfolio,
but also due to the shift
into blue chip cyclicals.

89. Neil Woodford
“This was Link’s decision and one I cannot
accept, nor believe is in the long-term
interests of LF Woodford Equity Income
Fund investors.
We have taken the highly painful decision
to close Woodford Investment
Management.”
Woodford Capital - “Woodford Equity Income Fund to Wind Up” - 15th October 2019

90. The Portfolio Over Time

92. Dominant Style Classification over Time

96. Housebuilders
Tobacco & Foods

97. Cyclicals
Defensives

98. Lessons for Investors

99. 1.Focus on high expected return stocks
• Use the StockRanks to ensure broad exposure to QVM.
2.Keep a low exposure to speculative shares
• Use the RiskRating Classifications to help here.
3.Ensure diversification across sectors
• Use the Sector Classifications to ensure no large sector bet.
4.Keep micro-cap & illiquid investments low
• Use the Size Groups to help balance your portfolio.
5.Sell your losers and run your winners
Remember you might be wrong…

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