Woodford Equity Income wind up: Questions answered

Wednesday, October 16, 2019 - 15:25

What should investors in Equity Income do now?

Frustratingly for investors, there’s still nothing they can do. The fund remains closed to redemptions and investors will now have to wait to see how much of their money they get back and how long it takes to wind up the assets. Investors who hold the fund outside an ISA or SIPP will likely have a capital loss which they can offset against gains on other investments in their portfolio. These investors can prepare their tax affairs for this.

How much of the current NAV might investors get back?

At this stage it’s impossible to tell. Link has advised that the costs of winding down the fund, particularly the illiquid assets, could be high and this will be taken from investor money, further eating into returns. Investors will also continue to pay an investment management fee to the new fund managers, BlackRock and Park Hill – again eating into returns. As a guide, since the fund shut to redemptions in June and attempted to move to more liquid assets it has lost 15.6% of investor money.

What can investors in Income Focus do?

The Income Focus fund is now suspended, meaning that investors can’t withdraw their money. Link will provide an update on the future of the fund in 14 days, ahead of the 28 days required of them. Investors in the fund will now have to wait to see what happens with the fund, and cannot buy or sell it during that time. You can read more here.

What does this mean for the future of the Patient Capital Trust?

The board of the Patient Capital Trust will make an announcement “shortly” on the future of the trust. They have two options: move the management over to a new fund manager, or liquidate the trust and return money to investors.

The effect of the Woodford news means the trust share price has fallen and may fall further. After launching in April 2015 at 100p the trust is now sitting at 32p – meaning investors who put their money in on day one are seeing a near 70% loss.

What damage has this done to the fund management industry?

A large scale collapse of a very prominent fund manager such as this will understandably hamper confidence of investors in the investment industry. The media focus on this and the large number of investors involved mean that it has received extensive coverage. This is particularly the case as it has gone on to have a negative impact on Patient Capital and Woodford Income Focus. However, we should remember that this is just one fund manager, not indicative of the whole industry or of active management. For comparison, the Woodford Equity Income fund has around £3bn in assets compared to the UK Equity Income sector's total assets of £50bn.

However, the industry can learn lessons from this debacle. The FCA must speed up its review of illiquid assets held in UCITS fund, and investors should focus more on how liquid the assets are within the funds they own.

Are illiquid assets suitable at all for open ended funds with daily dealing?

We’ve seen it before with open-ended property funds and now with holding large levels of unquoted assets in a UCITS funds, that daily liquidity is not always suitable. The solution is either to have more regular fund suspensions or that funds offer less regular dealing, moving to weekly or monthly liquidity.

We’re likely to see more regular suspensions in the property fund space, following the FCA’s changes earlier this month, which mean that Non-UCITS Retail Schemes (NURS) funds that have uncertainty about 20% or more of their assets must suspend dealing. This doesn’t apply to UCITS funds, and we wait to see what the FCA decides for that area of the market. However, there needs to be serious thought given to the appropriateness of daily dealing in open ended funds investing in illiquid assets going forwards.

These articles are for information purposes only and are not a personal recommendation or advice.


ajbell_laura_suter's picture

Laura Suter is Personal Finance Analyst at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.