What happens next for holders of Woodford funds?
Investors in several funds managed by Neil Woodford have been dealt a blow over the past week.
Firstly, dealing was suspended in LF Woodford Equity Income Fund (BLRZQ62) on 3 June after an increased level of redemptions.
Anyone invested in the fund will temporarily not be able to sell. The suspension has been done to protect investors and give Woodford time to rejig the portfolio to hold more liquid investments.
Secondly, shares in investment trust Woodford Patient Capital Trust (WPCT) fell sharply on 4 June. This reflects concerns that the value of holdings in LF Woodford Equity Income, some of which are also held in the investment trust, will be negatively affected should they be sold off by the income fund.
There are also fears that the income fund might sell some or all of its holding in the Patient Capital Trust, of which it owns 9%.
WHY CAN’T I SELL MY INVESTMENT IN THE EQUITY INCOME FUND?
A sizeable number of redemptions from the fund and setbacks with numerous holdings have seen its assets slip from around £10bn to less than £4bn in the past two years. The loss of key client earlier this month, reported to be Kent County Council, appears to have been the final catalyst to make changes, hence the suspension.
As this is an open-ended fund, if investors are selling or redeeming their holdings then assets need to be sold to pay these investors.
Because the fund holds a relatively large proportion of unquoted investments which are not as easy to sell, the asset manager has had to offload the more liquid quoted equities in the portfolio.
This creates something of a vicious circle and is why trading has been suspended to protect current holders in order to rebuild the proportion of more liquid holdings.
WHEN WILL THE SUSPENSION BE LIFTED?
We don’t know exactly when dealing in the fund will resume although the asset manager has promised to keep holders informed. We do know that a review must happen every 28 days.
Head of active portfolios at AJ Bell Ryan Hughes says: ‘Woodford has indicated that they will be looking to reposition the portfolio away from illiquid holdings during the suspension and therefore investors may have to be patient for the fund to reopen.’
WHAT ABOUT WOODFORD’S OTHER FUNDS?
Both Woodford Patient Capital and LF Woodford Income Focus (BD9X6D5), another fund in the Woodford stable, continue to operate normally. However, Woodford Patient Capital has seen its shares suffer double-digit falls in the wake of the income fund’s announcement.
Winterflood Securities says: ‘We have concerns that the structural difficulties being experienced by the open-ended fund could have a negative impact on the net asset value, share price and rating of Woodford Patient Capital.’
WHY DOES THE STRUCTURE OF THE FUND MATTER?
Investment trusts are closed-end funds and trade on a stock exchange. Any investor seeking to exit an investment trust like Woodford Patient Capital will sell to another investor, rather than asking the asset manager to redeem their shares as per the open-ended income fund.
For this reason, investment trusts are often seen as being more suited to holding illiquid assets than open-ended funds. A rush from investors wanting to sell will only affect the share price and not force the fund manager to conduct a fire-sale of assets in order to pay back investors their money.
It is possible that many investors put money into Woodford Equity Income Fund in the belief that it was full of large cap, liquid stocks. The reality is that the mass of redemptions in recent years has seen Neil Woodford sell many of the more liquid holdings, thereby making the less liquid investments a greater proportion of the overall portfolio.
WHAT SHOULD INVESTORS DO NEXT?
While investors in the income fund have no choice but to wait for the suspension to be lifted, we would suggest in this situation that it is important to review the new portfolio, once Neil Woodford has complete his reconstruction, before making any decisions about whether to hold or exit.
Investors should also take time to revisit all of their investments and make sure they are comfortable with the underlying portfolios of any fund or investment trust holdings.