A harsh lesson for Woodford investors

5 mins. to read
A harsh lesson for Woodford investors

The suspension of Neil Woodford’s flagship Equity Income fund has left investors trapped and badly affected the performance of his Income Focus fund, as well as his investment trust.

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The announcement last Monday of the suspension of the £3.7bn Woodford Equity Income fund will have hit investors like a bolt from the blue. Dealing has been suspended until further notice, leaving people unable to access their money and vulnerable to any further weakness in the performance.

Woodford is probably the country’s best known fund manager and after having made his reputation at Invesco Perpetual left to set up his own firm in 2014. At its peak in May 2017 his flagship Woodford Equity Income fund had amassed £10.2bn in assets under management, but a prolonged period of poor performance has resulted in massive investor outflows that has seen the figure tumble to £3.7bn with the redemptions gathering pace in recent weeks.

The sheer scale of the outflows, coupled with the fact that he had built up a significant exposure to less liquid holdings, led the Authorised Corporate Director (ACD) Link Fund Solutions to suspend dealings ‘to protect the investors in the fund’ following ‘an increased level of redemptions’.

Liquidity trap

The large outflows meant that the manager had become a ‘forced’ seller of some of his stocks, thereby putting further downwards pressure on their valuations. These sales will have had to come from the more liquid part of the portfolio, which will have increased the proportion of the less liquid holdings.

Woodford has said that he will be looking to reposition the portfolio away from these harder to sell positions during the suspension, which suggests that investors may have to be patient for the fund to re-open.

Darius McDermott, Managing Director of Chelsea Financial Services, says that while it will be worrying for investors and frustrating for those that would like to access their money, it has been done for their benefit.

“We will have to wait and see what action is taken next. But I would urge investors not to panic. The suspension of trading is in the interest of shareholders, so Neil is not forced to sell holdings quickly, at a lower price.”

Don’t panic

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Woodford has already sold a number of shares from his Equity Income fund, raising £95m in the first few days after the suspension, while investors withdrew £50m from the Woodford Income Focus fund – that remains open for dealing − in the first two days following the announcement. Both products lost about 4% last week. 

The rush for the doors is likely to continue, especially as Hargreaves Lansdown, the country’s largest retail stockbroker and a major supporter of Woodford, has now removed both funds from its Wealth 50 recommended list. 

Adrian Lowcock, Head of Personal Investing at Willis Owen, says that whilst performance of the Equity Income fund has been disappointing it hasn’t collapsed.

“There is likely to be further impacts in the short-term, but many of Woodford’s investors have supported him for a long time and he has rewarded their patience in the past with some exceptional returns, so I expect there to be a core base of investors who will look to stay invested through this period. However all this depends on how things look and what happens when the fund re-opens.” 

Woodford Patient Capital – just how patient do you have to be?

His investment trust, Woodford Patient Capital (LON:WPCT), has also been caught up in the turmoil. Prior to the suspension of the Equity Income fund the shares had been trading at around 80 pence, but at time of writing they had plunged to less than 60 pence, a fall of more than 25%.

A large proportion of WPCT’s £900m of assets are invested in unquoted and early-stage companies held by Woodford Equity Income, which at the time it was suspended had approximately £3.7bn of assets under management. The fear is that the valuations could suffer as the open-ended fund offloads these holdings to meet client redemptions.

WPCT was well received when it floated on the market in April 2015 and initially the shares traded well above their issue price of 100 pence, but they have experienced a long and painful decline since then. At 60 pence they are on a discount of 31% to their latest published NAV of 86.9p on 6 June, although this clearly reflects what investors think the true underlying value actually is. 

Don’t be fooled by the discount

The broker Numis says that they remain wary on the outlook for WPCT shares, even though they are trading on a wide discount, given the number of potential implications from the Woodford Investment Management outflows.

They point out that Woodford Equity Income holds a 9.9% stake in WPCT, acquired in April in exchange for stakes in five unquoted assets. In addition, the removal by Hargreaves Lansdown of both of Woodford’s open-ended funds from its Wealth 50 recommended list, is likely to have a knock-on effect on the 23% stake in the investment trust held by their clients.

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If the exodus from Woodford’s open-ended funds continues there could be further selling pressure on the holdings of WPCT. This could be significant as Numis calculate that over 60% of the investment trust’s portfolio, by value, was also held in the Equity Income fund at the end of April. 

Most of WPCT’s portfolio is focused on minority stakes in unquoted investments that are normally very illiquid. Their valuations could really suffer if Woodford is perceived as a forced seller, and there could be a dilution effect if he is unable to follow his money in future fundraising rounds. The more visible part of the spectrum, the quoted holdings, have already seen some serious price action, most notably the US-listed Autolus Therapeutics (NASD:AUTL) − 7.1% of WPCT, and 3.1% of the Equity Income fund at 30 April −that fell 23% in US Dollar terms last week.

Woodford has had long periods of underperformance in the past, but always had the confidence and backing to stick to his beliefs and come out on top. He will never have been tested like this though, particularly as the move into illiquid holdings in an open-ended fund was a self-inflicted wound. Sooner or later his exposure to out-of-favour domestically focused UK stocks will come good, although it is questionable how many investors will keep the faith long enough to be rewarded.

Comments (2)

  • Peter Berg says:

    All very well HL removing Woodford Equity Income from their Wealth 50 list, but they only did this AFTER it had suspended trading, and crucially 2 very senior HL managers withdrew significant funds just BEFORE suspension (whilst still promoting it). Outrageous behaviour from Mark Dampier and Lee Gardhouse.

  • Lawman says:

    I do not complain that the underlying holdings of WPCT have fallen. I should have realised that Mr Woodford had no experience in ‘start ups’.

    I do complain at the incestuous relationship between WEI and WPCT, with WEI using WPCT as a dumping ground for some of its holdings, which WEI should never have held in the first place. The directors of WPCT have not performed as they should. The brief announcement last week showed complacency and contempt for shareholders.

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