Woodford’s Fall: Could ODD Have Stopped the Biggest Fund Failure in a Generation?

The dramatic collapse of the Woodford Equity Income Fund (WEIF) in 2019 was a shock to the UK investment industry. A star fund manager, lauded as recently as 2018 for his ‘disciplined, valuation-orientated investment approach’, Neil Woodford was at one point trusted with £10bn assets under management – most of it from retail investors. 

Dips in performance after 2017 first prompted investors to start withdrawing their money. But it wasn’t until 3rd June 2019 that the fund was suspended, following a request from Kent County Council – the WEIF’s single biggest investor – to redeem its £236m holding in full.

The sell-off had uncovered Woodford’s over-exposure to illiquid assets, which could not be sold in time. About 300,000 retail investors were trapped in the fund following the suspension.

Questions were quickly raised about the future of active fund management, the speed, and effectiveness of the Financial Conduct Authority’s (FCA) response, and the failure of the fund’s authorised corporate director (ACD), Link Fund Solutions, to adequately monitor the fund and manage liquidity risk. 

Almost six years after the fund closed, on 5th August 2025, the FCA announced that it has provisionally fined Neil Woodford £5.9m and Woodford Investment Management (WIM) £40m for their failures in managing the WEIF. The regulator concluded that Woodford and WIM made ‘unreasonable and inappropriate investment decisions’ between 2018 and 2019 which ‘significantly increased risk of the fund being suspended’. It also found that Woodford had failed to accept responsibility for the fund’s liquidity.

The incident has had a lasting impact on those retail investors, but it also raises questions for institutional investors. 

Could proper Operational Due Diligence (ODD) have uncovered weaknesses in the fund?

A robust ODD programme would have potentially uncovered several key weaknesses or red flags regarding the fund. For example, ongoing ODD would typically consider whether a manager is adhering to the fund’s stated objectives and their investors’ expectations. WEIF’s growing exposure to small cap and unlisted stocks, which are illiquid in nature, represented a drift from the fund’s stated income focus, and would likely have been a focus for ODD.

The FCA stated that LFS failed to act with due skill, care, and diligence in its management of the WEIF. For sophisticated investors with robust ODD processes, assessing the ACD would likely be a standard component of due diligence on a UK-domiciled fund like WEIF.  

The Woodford case highlights the need for investment managers to ensure that due diligence is carried out on their critical service providers and counterparties. According to Fundsmith founder Terry Smith, the mixture of unquoted and small-cap holdings in a daily-dealing open-ended fund was a “lethal combination” that gave investors the illusion of liquidity. But a large number of redemptions from such funds is comparable to shouting “fire” in a crowded theatre, he said. 

Too big to fail? The problem with ‘star managers’.

Investors might assume that a fund’s size and reputation is a proxy for operational resilience. However, there are myriad examples where this has not been the case and serve as cautionary tales against complacency. This is best exemplified by Bernie Madoff, who orchestrated the largest Ponzi scheme in history until his arrest in December 2008.  

Effective due diligence could have identified the following potential red flags, which a modern ODD programme would uncover: 

• Lack of independent custody: 
  The firm breached basic asset segregation principles by acting as both investment manager and custodian. The concentration risk and lack of third-party verification of holdings should have been flagged during custody reviews.
• Inadequate audit oversight: 
  Madoff’s firm used an auditor that did not meet the usual criteria required for institutions that manage billions in client assets. The two-person accounting firm employed by Madoff's company lacked registration with the Public Company Accounting Oversight Board and had not undergone a peer review, raising concerns about its credibility and oversight. It declared absence of audit work for over fifteen years, yet it falsely certified his financial statements. Thorough due diligence, covering audit scope, professional credentials, and regulatory filings, should have identified this as a significant control weakness.
• Opaque investment strategy: 
  Madoff’s limited disclosure of trading activity, counterparties, and portfolio composition would not meet standard transparency requirements. Proper due diligence would have revealed a lack of operational transparency.  

Several high-profile analysts raised suspicion about his purported returns. The most persistent was financial fraud investigator Harry Markopolos. The former securities industry executive reverse-engineered Madoff’s trading strategy and revenue streams, leading him to reject the mathematical feasibility of Madoff’s claims. 

Despite receiving several formal complaints, the SEC failed to act. In 2009 a damning report asserted that the regulator “never properly examined or investigated Madoff's trading”.  

In today's fast-paced investment landscape, it is imperative for institutional investors to regularly monitor their external managers to ensure they are meeting their fiduciary duties and managing operational risks effectively. Failure to do so can result in significant losses, as seen in the Woodford case.  

By co-sourcing ODD with a leading provider like Thomas Murray, institutional investors can complement their internal capabilities with external expertise and technology to deliver a robust ODD programme.

If you are concerned about operational due diligence, experts at Thomas Murray can help. Contact us to discover how we can support your operational risk management and ensure compliance.

Please email: Stephen Merry OR enquiries@thomasmurray.com.