We need to talk about Woodford…
You have probably heard that Neil Woodford, one of the UK’s best-known stock pickers, suspended his Woodford Equity Income fund after rising numbers of investors asked for their money back. It’s been all over the news. This post looks at why the fund was ‘gated’ and what investors can do next.
In a statement, Woodford Investment Management said the fund was closed to withdrawals to ‘protect’ investors. Investors had been withdrawing their cash from the fund at such a rate that there was a risk that Woodford would not be able to pay them back quickly without damaging the value of the fund and existing investors’ money. The fund holds shares in smaller businesses, many of which are not listed on stock exchanges. This makes them illiquid assets and if Woodford is forced to sell, can result in sale prices significantly below their intrinsic value.
The Equity Income fund reached its peak in May 2017, when it was valued at £10.2bn. But in the second half of the year as the performance started to wane, the fund started to shrink. In recent months, the rate at which savers have been selling out of the fund has accelerated. In just four weeks, the fund lost £560m of its value. If withdrawals had been allowed to continue, the fund manager would not be able to sell the illiquid investments fast enough without offloading them cheaply, which would be harmful to remaining fund investors.
Why were people taking their money out?
Performance of the fund has been poor for some time. Woodford’s investment style is contrarian and against current market trends. It may well be that the fund is in a prolonged performance lag that will eventually catch up as economic fundamentals change, but some of the investments have, so far, been unsuccessful. Provident Financial, for example, has had its difficulties, as have Kier and Purplebricks.
In addition, there has been concern over the proportion of unlisted, illiquid stocks in the fund. Any equity fund like Woodford’s can invest up to 10% of their assets in private companies. But as people cashed out of the fund, the relative proportion of unlisted firms within it has risen, making it harder to avoid breaching the 10% limit.
Why is this such big news?
This kind of suspension is rare for a fund investing in company shares and is more common with funds investing in illiquid assets such as property. Some property funds had to close their doors to trading in 2016 after the EU referendum result. But when herd mentality takes over and there’s a run on investments (remember Northern Rock?) sometimes the fund manager has no choice but to close the fund to withdrawals. The Woodford Equity Income was a popular fund which appeared on Hargreaves Lansdown’s and AJ Bell’s recommended lists (and which have since removed it) as well as other buy lists including those by professional fund-raters like Morningstar, RSMR and Square Mile Research.
There may also be many investors with money in the fund without knowing it. For example, those invested in Hargreaves Lansdown’s Multi-Manager Income & Growth fund will be exposed to the fund. Your pension savings may also be exposed. If you have a self-invested personal pension (Sipp), check the list of funds in which you have chosen to invest. If your personal pension is managed by an adviser, contact them or check your statement to find out if you are invested.
What’s next for the fund?
Woodford says he plans to restructure the Woodford Equity Income fund portfolio to reduce its exposure to illiquid and unquoted investments, down to zero. While the fund is suspended, your savings are still being professionally managed, so Woodford will continue to charge a fee. The vast majority of investors pay an annual charge of 0.75%. Pressure has been mounting for these fees to be waived. We believe that Woodford should halve the fee to reflect the difficult situation.
Chair of the Treasury Committee Nicky Morgan said investors in the Woodford Equity Income fund should not be charged management fees while trading in the fund was suspended. So far Woodford has stood firm. However, Hargreaves Lansdown has promised to waive its broker fee for its investors in the fund and we hope other investment platforms will follow suit.
What should investors do?
There is nothing to do now other than wait. The suspension will last at least 28 days but could last for much longer. It’s important to remember that the fund has been suspended because of liquidity concerns — their underlying investments are still there — and if given the room to stabilise the fund could recover some of the lost ground.
At the moment, it’s not possible to buy any more units in the fund. This means your platform will either stop taking your direct debit until the fund reopens, take your money and put it into a cash account or ask you where else you would like to invest it. Hargreaves Lansdown says it will continue to collect investors’ direct debits. It is writing to savers to ask them where they want their money to be invested.
This, if nothing else, is a stark reminder to investors not to invest in one company or one type of investment, nor with one individual — however, diversified their fund might be. Concern surrounds the fact that Hargreaves Lansdown didn’t take the fund off its Wealth 50 list until after the suspension of the fund, despite a number of warning signals that the fund wasn’t performing as hoped. But Hargreaves Lansdown wasn’t the only buy-list to hang on to the fund for much longer than it should have done… As a result, the FCA, the regulatory authority, said it would review Best Buy lists from all platforms. It shouldn’t stop there, it should look at all recommended fund lists.
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