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Woodford Equity Income Fund: dealing suspended

An unprecedented level of withdrawals by investors has led to dealing in Neil Woodford's flagship fund being suspended.

by
Rob Morgan

04.06.2019

Woodford Investment Management has announced that dealing has been suspended in the Woodford Equity Income Fund. Currently, it is not possible to buy (including through monthly contributions), sell or transfer shares in the fund.

The move is in response to a high level of withdrawals by investors and is designed to allow manager Neil Woodford time to reposition the part of the fund's portfolio invested in unquoted and less easily-traded stocks, and into more liquid investments.

The fund contains a significant number of unlisted businesses, which can take time to sell at an appropriate value, as well as a collection of less-frequently traded stocks in which the manager holds large positions. To attempt to sell these in significant quantity could, in itself, depress the price and disadvantage holders of the fund.

Although it is regrettable investors are currently locked in, we believe this decision is likely to be a rational response to prevent any ‘fire sale’ of assets - and in the best interests of all remaining investors. At this time we do not know how long the suspension is expected to last and we will provide an update as soon as we know more. In the meantime, the value of the fund will, as usual, continue to be based on the price of the underlying holdings.

How has this happened?

Having enjoyed early success when he set up his own firm in 2014 after leaving Invesco Perpetual, Mr Woodford’s popularity has waned as performance dipped following a series of stock-specific disappointments.

Investors began withdrawing money from Woodford Equity Income Fund in earnest in the summer of 2017. The fund had begun to lag rivals earlier that year, having previously outperformed, and then in August a collapse in major holding Provident Financial delivered a blow. Among the ensuing stock-specific setbacks was a plunge in the shares of drug maker Prothena a year ago and the dwindling share price of technology investor Allied Minds, which at one point was a major holding.

We removed the fund from our Foundation Fundlist in May 2018. Although the manager’s stock picking record had been worsening for a short period, the major reason behind our decision was a growing concern that performance would become increasingly governed by a relatively small number of existing earlier-stage and unlisted businesses in the portfolio, especially in the event of large withdrawals. In our view, this was a departure from the original income-driven philosophy of the fund and we felt there were better options for investors in this area.

Continuing to follow the fund, we noted in our update earlier this year the smaller company, growth-orientated holdings in the fund were increasingly dominating returns amid further redemptions. We worried that any further stock-specific disappointments could have a greater impact in a higher risk, more concentrated portfolio reliant on less predictable smaller companies such as biotech firms.

Since then the situation became increasingly problematic for Mr Woodford due to continued poor performance and unrelenting outflows from investors selling, which meant he had to sell further holdings. The fund size is currently £3.7 billion, down from £6.8 billion a year ago. It has now reached the point that the areas the manager can readily sell to fund withdrawals have been exhausted without prejudicing the interests of both remaining and redeeming investors. The only option available is to temporarily prevent withdrawals to allow for a period of adjustment.

We had concerns about the growing influence of smaller, illiquid positions in the event of further outflows. However, it would have been very difficult for Woodford IM, or anyone else, to have foreseen the stampede of investor withdrawals over such a short time frame, arguably exacerbated by intense media coverage. It underlines the risk of holding these kinds of positions to a significant degree in an open-ended fund. Mr Woodford has indicated the portfolio is going be repositioned during the suspension period, away from the more illiquid holdings. You can see his explanation video on the subject here.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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