Moral of the Woodford saga: if you want to back start-ups, do it yourself

Hounds are baying for the blood of former star investment manager Neil Woodford, whose shrinking funds have closed for withdrawals. His promoters such as the broker Hargreaves Lansdown have also been taking media flak, as has the Financial Conduct Authority, whose critics say it should have spotted the problem early and intervened. There are suggestions that Woodford and his associates have made ‘a huge pile of money’ (to quote Merryn Somerset Webb in the FT) out of an over-puffed venture in which small investors are now stuck — and that all those responsible should queue up for a public lashing from the Treasury select committee.

So it goes: as a parable of financial hubris, this looks like an open-and-shut case. But I return to the point I made last week, that Woodford was one of the few big investors willing to put money into smaller, innovative companies and that was, in principle, a good thing; indeed, this column has frequently trumpeted the value of trying to pick potential winners in fields of science in which UK laboratories excel. The problem for Woodford’s multibillion vehicle is that those small holdings were by nature illiquid and represented what now looks like an imprudently high proportion of his funds, not least because when investors started to pull out, he was forced to sell his more liquid holdings in larger listed companies first.

The real lesson is never to be seduced by ‘star stock-pickers’ and to remember that any large collective fund can’t be expected to do much more than track major indices and give you your cash back when you ask for it. By all means back science-based start-ups as well; but do it yourself, on the basis of your own research. That’s more satisfying if you turn out to be good at it; and you’ll have no one else to blame if you’re not.