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Fund disruptor: inside Woodford Investment Management

Fund disruptor: inside Woodford Investment Management

A business park in the outskirts of Oxford is not typically somewhere you associate with a thriving investment business housing the UK’s most famous fund manager.

In many ways, Woodford Investment Management (WIM) is not your typical fund business. To be allowed entry into the firm’s headquarters one signs in with an iPad. This seems positively space age from the pen and paper sign-in policy generally applied across most asset management firms.

‘When you registered today, you did it through the iPad, which means I’ve now got your name and title. The procedures here are heavily digitised and I can check anyone who comes through the door,’ WIM chief executive Craig Newman says somewhat ominously.  ‘We can also check every piece of information around voice recordings and put them in Word form and then use artificial intelligence to look for certain patterns.’

Where does this end exactly?

That is not to suggest something sinister is going on behind the scenes, with this sophisticated use of technology done in the interests of the client. ‘The way we deploy technology is something that is profoundly different from other organisations. What we are thinking about is revolution, how a business like this is structured, operated and controlled,’ says Neil Woodford.

‘The digital infrastructure means there’s nothing that goes on in this organisation that we don’t see. This is not technology for the sake of it, but to deliver the right outcomes for clients.’     

WIM clearly has taken some big steps into a brave new digital investment world in the three years since the firm was created by Newman and star fund manager Woodford, following their exit from Invesco Perpetual. 

One piece of kit the firm is particularly proud of is its ‘dashboard’, which it has applied over the last six months. ‘Everything that happens in Neil’s funds and mandates, everything he needs to know on any point of the day is available to him on a single dashboard on any device,’ Newman (pictured above) explains. ‘I also have a dashboard and if any error or compliance issue occurs in the business it alerts me.’

 Getting off the ground

Without friends, staff and family, WIM might have found it a little bit hard to get off the ground.

At the outset, the firm had an informal arrangement with serial entrepreneur Peter Dubens, who lent the business around £1 million to get leases and commercial arrangements in place. Woodford had known Dubens from his Invesco Perpetual days when he invested in his private equity vehicle, Oakley. The loan has since been repaid.

The office WIM moved into needed a fair bit of renovation. The firm drafted in the uncle of analyst brothers Stephen, Ross and Paul Lamacraft – who also joined from Invesco Perpetual – to help build a kitchen, while furniture was bought on the proviso it could be delivered in 24 hours.

Newman used his handyman skills to ensure WIM was fit for purpose ahead of Woodford’s arrival a few months later. The hard graft paid off and in a mere three months the firm received a regulatory green light in May 2014. 

Shaking things up

WIM made its intentions loud and clear from the start. It wanted to disrupt the fund industry. ‘A lot of the things we have done come from what was frustrating me in the industry,’ Newman says. ‘I didn’t think we communicated openly as an industry and felt a lot of the documentation was backward-looking.’

The company has done a number of things to shake up sector practices since its launch (see table below).

Its flagship UK income fund raised a record £1.6 billion during its launch period in June 2014, while Patient Capital also broke investment trust records by raising £800 million for its April 2015 float. The most recent addition to the stable - the Income Focus fund - raised a respectable £553 million at its April launch.

The firm was also one of the first to stop charging investors for research and scrap bonuses for all employees. 

May 1 2014
Woodford gets FCA approval
June 19 2014
Fund goes 'live' after raising £1.6bn over two-week offer period - a record fund raise for UK
July 2014
Equity Income fund's portfolio fully disclosed
April 2015
WPCT floats after raising £800m - a UK investment trust record according to AIC
April 2016
Woodford announces it will pay for research
April 2016
ALL fund fees, including trading costs, on equity income fund revealed and updated each month. This has been replicated on WPCT and will be on new Focus Fund.
August 2016
Woodford scraps bonuses for all employees
November 2016
Government announces Patient Capital Review in the Autumn Statement
March 2017
WEIF breaks through £10bn
April 2017
Income Focus launches after raising £553m - third biggest UK fund launch behind our income fund and WPCT according to Citywire.
June 2017
Total assets under management £17.8bn

 

Since launch, WIM – which was revenue generating from day one, thanks to a £4 billion mandate from St James’s Place – has raced to near £18 billion in assets under management.  Full-year numbers released by WIM at the end of last year showed profit at the company surged by 212% to £35.45 million in the 12 months to March 2016, with revenue almost doubling to £58.4 million.

But the perception that WIM’s success has been a walk in the park frustrates Newman. He accepts while clearly having Woodford as a brand was an obvious advantage, he does not think people have appreciated how WIM has exploited it.

‘People say “It’s easy for them because they’ve got Woodford”, but that doesn’t really represent what’s gone on underneath,’ Newman says. ‘It was hard to get going. Launching a fund management business is not easy and as a fully outsourced business we had all kinds of problems with regulations and third party issues.’

Woodford underlines this: ‘It’s been the most challenging three years of my life, I’ve never worked harder. But we are not at all complacent about what we have achieved. We are not about to put our feet up on the desk and light a very large cigar. We are absolutely driven to continue to improve the business and improve my skillset as a fund manager.’ 

He refers to WIM as the most ‘uplifting’ experience in his 30-year career. ‘There is an amazing culture and collection of people at this organisation and I’ve been liberated as a fund manager with a support infrastructure like I’ve never had before.’

Patience

WIM’s three-year anniversary comes during one of Woodford’s trickier spells after a tough 2016, with a few of his holdings encountering some well-publicised problems.

In a recent video interview with Citywire, Woodford responded to the flak he has received in some quarters for his recent run, admitting the criticism hurts.  

However, he still remains well ahead of benchmark though since launch, with the Income fund up 38.8% over three years to 2 June versus the FTSE All Share’s 25.5% rise.

Woodford recently overhauled the fund, increasing its exposure to UK-focused stocks, and is not too concerned by last year’s blip. ‘When we launched the fund in 2014, we said that we would aim to deliver high single-digit returns per annum over a three to five-year period.

'The portfolio has evolved over time and continues to do so, most recently taking advantage of what we see as a compelling, contrarian opportunity in domestic stocks.’

Meanwhile, Patient Capital has also found the going tough after soaring to a 15% premium on its launch. The trust is currently on a 2.3% discount, although this has narrowed from 7.2% in May.

The portfolio was badged Patient for a reason. ‘We said right from the start to investors in this fund that this is a collection of assets, which has the potential to deliver outstanding returns to investors,’ says Woodford.

‘We are in the infant years of that fund, but I am astonished by how much further we are on now since launch, I thought the portfolio would take longer to mature. We have some shareholdings in some utterly phenomenal businesses that I believe will become global scale businesses in a relatively short time.’ 

New blood

While WIM has invested heavily in infrastructure, spending more than £10 million since launch, it is yet to hire a fund manager support cast for Woodford.

At launch, WIM said its goal was to build a ‘large scale multi-generational asset’ management business. The assumption was that WIM would not have much trouble attracting fund managers on the back of this vision. So why does the business still have so few fund managers?

Woodford (above) admits he has ‘kissed a lot of frogs’ in WIM’s search for suitable talent. ‘I find it quite odd that people expect us to do what other fund managers do and simply hire other fund managers to grow the business. We will grow this business in a different way to other fund managers. We have a lot of strategic thinking going on here that does not fit the conventional map.’

Newman adds: ‘We want to make sure we maintain the cultural heart of this business and the way we run money. Our intention is not to hire clones of Neil, they can have different opinions, but they must have the same core ethos and belief system around long-term patient valuation-driven investment.’ 

Woodford and Newman have a tight grip on WIM, owning 65% and 35% respectively, but they do not think in line with the common school of thought that relinquishing some of this will help attract talent.  

‘We didn’t withhold equity to do anything other than maintain control and direction, and ensure the business was focused on the right things,’ Newman says. ‘We also wanted to protect the business from people who are here for the wrong reasons. The people who are here, especially at the senior management level, are here because they believe in what we do, they believe in the changes we are trying to make to the fund management industry, and our principles and goals.

‘We have talked to some fund managers and they have asked about equity in the business, but the fact that it’s not going to be given hasn’t prevented them from coming back to the table. That we haven’t subsequently hired them has been for other reasons.’

While WIM is clearly in no rush to make hires and there is a chance it will happily motor on with three funds in its stable, Newman expects the business to look very different in three years’ time, with a diversified real assets strategy an area that has caught his eye.

‘It is highly unlikely the business will look the same in three years, but we’re not going to prioritise the growth strategy that everyone is expecting us to deliver against,’ he says. ‘There has been a massive investment in infrastructure here, which at some point will result in us doing things that make us look like a different fund business.’

‘We have a scalable infrastructure,’ Woodford adds. ‘I always got irritated by the word boutique. We have the aspiration to build something way beyond a boutique. That doesn’t mean we want to be Vanguard, but everything we have done is about creating a business that could scale in an effective way.’

From a fund management perspective, Woodford feels he has plenty on his plate. ‘The next three years of the business is about growth and my ability to deliver.’

After its exponential growth, WIM now has 70 staff on its books and will soon move to a new floor in the same building with double the space. The firm will be hoping it can find a fund prince or two to fill some of the extra capacity.  

 

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