Burford Capital shares down 65% in further blow to Neil Woodford

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Neil Woodford Burford Capital shares down 65% in further blow to Neil Woodford

Nearly £2bn wiped off value of second largest holding in his suspended flagship fund

Neil Woodford holds a 7% stake in Burford, which specialises in providing funding for lawsuits. Photograph: Reuters

The fund manager Neil Woodford has been dealt a new blow after more than £1bn was wiped off the value of Burford Capital, the second largest holding in his suspended flagship fund.

Shares in Burford Capital, which specialises in providing funding for lawsuits, plummeted 65% in 24 hours after the US hedge fund Muddy Waters took a short position on its stock, betting that the price would drop, and then launched an attack on the company’s financial status.

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Who is Neil Woodford?

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Neil Woodford was once the UK’s biggest star fund manager, personally managing a £25bn mountain of money on behalf of pension funds and other investors at Invesco Perpetual. When he decided to quit Invesco and go it alone in 2013 it was a huge shock for the fund management industry. Invesco shares slumped by 7% on the day he announced his departure.

At Invesco Woodford held control of huge stakes in some of the UK’s biggest firms, and his opinions mattered. His criticism of AstraZeneca chief executive David Brennan in the 2012 shareholder spring was widely regarded to have cost him his job, and his critique of BAE’s attempted £28bn merger with Airbus is acknowledged as one of the reasons the deal collapsed.

Woodford, who was widely referred to in the media as an investment “hero” and fund management “star”, had done exceedingly well over his quarter century there. A £1,000 investment placed when he started at the firm in 1988 would have risen to £23,000 by the time he left.

Woodford accidentally fell into fund management and hadn’t heard of the term until he rocked up in the City in the 1980s sleeping on his brother’s floor while looking for a job. He got his first break in insurance, before drifting into fund management. He had left school wanting to fly fighter jets but couldn’t pass the RAF’s aptitude test, and instead read economics and agricultural economics at the University of Exeter.

Feeling he had outgrown Invesco Perpetual, he set up his own firm Woodford Investment Management in 2014, on an industrial estate near Oxford. Within two weeks of launching, he had raised £1.6bn, a UK record, and it quickly grew to £16bn. In its first full year his flagship fund returned 16% and Woodford, a devotee of veteran US investor Warren Buffett, was dubbed the “Oracle of Oxford”.

Asked if he ever doubted his judgment, Woodford once said: “Daily. You must never, as a fund manager, stick your head in the sand saying ‘everybody go away, I’m right, I’m right, I’m right’. You’ve always got to expose yourself to criticism and the analysis that you may be wrong.”

Woodford went on to say that the secret of successful fund management was a balance of arrogance and humility. “You have to have a sufficiently strong arrogant gene to back your judgment, back your conviction. If you didn’t, you would end up with a portfolio that looks very much like the index. But, equally, you must have the humility to accept that you will get things wrong.”

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Burford, which is chaired by the former Barclays boss and Treasury mandarin Sir Peter Middleton, had been one of the strongest performing stocks in Woodford’s portfolio.

The fund manager, who was forced to shut his Woodford equity income fund in May following a surge in redemptions, holds a 7% stake in Burford.

Woodford’s former employer, Invesco, is Burford’s largest shareholder with a 14% stake in the business.

A letter by Muddy Waters released on Wednesday confirmed its short position and claimed that Burford was a “poor business masquerading as a great one”.

The US hedge fund criticised the way Burford measured returns on its investments, saying they were “heavily manipulated and greatly misled investors” and that much of its profit since 2012 had come from just four legal cases.

The attack caused Burford shares to slump from £13.95 on Tuesday afternoon to just 428p per share by midday on Wednesday. They later recovered to close at 605p.

It means Woodford’s stake, worth £212m on Tuesday, is now worth just £92m. Burford’s shares are still up 300% since Woodford’s first investment in June 2014. However, the £120m reduction in the value of the gated fund comes as he is trying to raise money by cashing in some of its holdings. Woodford needs to raise cash so that investors who want to quit the underperforming fund when it reopens will be able to leave.

The equity income fund, which is largely invested in the shares of smaller companies which are harder to sell, was suspended in May after its value slumped from £10bn to £3.7bn. The gating came after the fund could not meet a request from Kent county council for the return of £263m. Investors are now locked in until at least December.

In a market statement on Tuesday, Burford defended its position, insisting that its finances were “robust” and that returns from litigation rose to their highest levels on record at the end of June. It said the firm used the same accounting rules used by companies across the financial services sector, and that the auditors EY had given it a clean bill of health every year since 2010.

The litigation funding specialist said it had a “strong” cash position, with more than $400m (£329m) to hand. It acknowledged that it may need to raise fresh funds to fuel growth, but said: “This is a cause for celebration, not for alarm, because it means the business is growing rapidly.”

Burford said of the short attack:“Short sellers of this ilk are not long-term investors. Rather, their goal is to panic investors into selling their holdings and thereby to drive down the share price. If investors oblige them, then the attack succeeds, long-term investors are harmed and the short sellers pocket a quick payday.”

Nick Burchett, a fund manager at Cavendish Asset Management, said it was bad news for Woodford.

“This move will have Mr Woodford and Invesco seething. It seems the troubled Mr Woodford can’t catch a break at the moment,” he said.

“While shorting is certainly an important part of the markets when it comes to providing liquidity, this kind of activity can also be harmful to a business’s recovery prospects,” he added. “This is largely down to the fear factor. Once a company announces that it is hoping to raise funds, shorter sellers are able to jump into gear, while also declaring their reasons for shorting the stock to the wider markets.”

Woodford declined to comment.

Invesco said: “These investments were made and overseen in line with our robust investment and independent oversight processes. Invesco’s legal advisers are reviewing the accusations and we expect we will be able to make a broader statement in due course.”

Burford said it would issue a full rebuttal and call investors in due course, while chief executive Christopher Bogart was preparing to issue shares on the back of the dramatic share price fall.

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