Neil Woodford Equity Income Fund – what happened?

We have not recommended the Woodford Investment Management fund range to any of our clients, but the suspension of the Woodford UK Equity Income fund has been well-publicised and a number of clients have asked about what happened.

Neil Woodford is probably the best-known fund manager in the UK. He worked for Invesco Perpetual for 25 years, successfully running their Income and High Income funds with a contrarian style, largely avoiding the impact of both the 1990s dot-com bubble and the 2008 financial crisis.

In 2014 he left Invesco Perpetual to set up his own fund management company, Woodford Investment Management. His flagship fund, the Woodford Equity Income fund, was launched in June 2014, mainly investing in UK companies.

Fund Suspension

Initially the fund performed well, outperforming the UK All Companies sector in its first two years. Investors were attracted by Neil Woodford’s previous performance at Invesco Perpetual, and the fund grew to £10.2billion. However, performance began to falter, and investors started to withdraw their money, with one large institutional investor withdrawing £300million.

Funds generally hold a small percentage in cash or very liquid assets, meaning that withdrawals from the fund can be easily managed. Most funds will also have money coming in from new investors or monthly contributions, which can be offset against withdrawals. In the case of the Woodford Equity Income fund, the large volume of withdrawals had to be covered by selling some of the fund’s holdings, mainly in larger companies which are easier and quicker to trade.

This left the remaining fund unbalanced as most of its holdings were then in smaller companies or AIM (Alternative Investment Market, i.e. not listed on the main FTSE) companies. In some cases, the fund held such a high percentage of a company’s shares that selling the holding could only be done well below market value. As requests for withdrawals continued from investors, a decision was therefore taken to suspend the fund for 28 days on 3 June 2019, subsequently extended until December. This means that investors cannot access their money in the fund until at least then.

What happens next

The 6-month suspension is intended to give Neil Woodford time to restructure the fund back towards a range of larger companies. He remains convinced that UK companies are currently undervalued versus other global markets due to the uncertainty around Brexit, and that his long-term approach will pay off.

Should investors still wish to withdraw their money once the suspension is lifted, there should then be sufficient liquid assets in the fund to allow this. Some investors may decide to stick with the fund and others may see it as an opportunity to buy into the fund to benefit from Neil Woodford’s longer-term strategy.

Could this happen to other funds?

In theory, yes, as trading in any fund can be suspended, but it tends to only happen with funds which invest primarily in illiquid assets. Several UK commercial property funds were suspended in 2016 following the Brexit referendum, when investors were fearful for the impact on UK property prices, although these suspensions were all lifted relatively quickly. Multi-asset funds, which invest in a wide range of assets and sectors, are less likely to be affected.

Funds can also close to new investment but remain open for withdrawals – this can happen because a fund manager thinks that continuing to increase the size of the fund would start to have a negative impact on performance.

We are always available to discuss any queries or concerns, so just call or drop us an e-mail.

The value of your investment can go down as well as up and you may not get back as much as you originally invested.

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