The fund manager Neil Woodford has been dealt a new blow after nearly £2bn 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.
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.
It means Woodford’s stake, worth £212m on Tuesday, is now worth just £74m. Burford’s shares are still up 300% since Woodford’s first investment in June 2014. However, the £138m 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 it was investigating whether there was any misconduct related to the short attack.
“There is a clear line between appropriate commentary and market manipulation… 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,” Burford said. “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 did not respond to requests for comment.