Estimated reading time: 5 minutes
One of the UK’s most well-known fund managers, Neil Woodford, was forced to close his UK Equity Income fund to redemptions earlier this year. This meant holders of the fund that wished to sell, were unable to do so. It’s very unusual for a regulated fund investing into equities to do this and impacts investors in a few ways.
This extreme measure was taken because he was having to sell out of small and unlisted companies that he had invested into, to meet redemption requests from clients. However, when forced to sell out of such companies it is difficult to get a fair price.
As the rules of a regulated fund prevent holding more than 10% in unlisted equities, Woodford faced the choice of either selling at heavily discounted prices or suspending redemptions. He, and the fund’s administrator, decided the best option for investors was to suspend redemptions and try to slowly re-position the portfolio out of small and unlisted equities into larger company equities – which can be traded more easily.
This has ultimately proved to be not possible, as the high levels of publicity only encouraged more investors to prepare to sell out of the fund once it re-opened to redemptions. As a result - the fund administrator, Link Fund Solutions, have removed Neil Woodford as the fund manager and appointed other fund managers to wind down the fund. It has also led to the closure of Woodford Investment Management, and new fund managers are replacing him on two other funds he ran too.
If you are a holder of the Woodford Equity Income fund, this means you will now have to wait an undetermined period to receive an unknown amount of proceeds.
Some quotes in the media from holders of the fund, suggest some of those affected had not appreciated that this can happen with funds that normally deal daily. This means any investors that had planned on using this as a short-term source of funds (something we would never advise) are going to have to find another source.
It also clearly affects the performance of any investor in the fund. As Woodford was actually very transparent about what he was holding (he made his full list of holdings available on his website, prior the fund closing) other fund managers will have been trying to buy holdings he had to sell at a reduced price. This will have an outsized impact on those investors that only looked at Neil Woodford’s historic track record and put too much of their investment portfolio in the fund. The lesson here, is the importance of constructing a portfolio in a diversified manner, and not taking over-concentrated bets.
Is this normal?
No. At least not with equity funds. Because the underlying holdings are supposed to be mainly publicly traded equities, it is rare for an equity fund to close to redemptions. Although other equity funds may hold unlisted equities (within the 10% limit), it’s rare to see them holding a high percentage when the fund is suffering sustained outflows.
It is more common to see a daily-dealing regulated fund close to redemptions when they are investing directly into property. It happened in 2008 and more recently in the immediate aftermath of the Brexit vote in 2016. Once again it occurred when investors wanted to take money out of the funds and in this case, the fund managers would have to sell physical properties to raise the required cash. Of course, selling a building is not something you can normally do in one day…
Are Rosecut portfolios affected?
No. Rosecut portfolios have never held any of the affected funds.
Who is affected?
What is noticeable is how the professional investor community such as multi-manager funds, private banks and wealth managers had largely exited the fund, starting in 2017. Notable exceptions seem to be the Kent County Council Pension fund and Hargreaves Lansdown funds.
The majority left in the fund appear to be private do-it-yourself (DIY) investors or those advised by an independent financial adviser (IFA).
Why is it such big news?
His track record running money is actually very good. Since he started running money in October 1988 to September 2019, his cumulative return is 2015%. By comparison the FTSE All Share index has returned 1232% and the average UK Equity Income manager has returned 1251%. (Source: Citywire Wealth Manager)
Because of this track record and the marketing effort put into the launch of his own fund in 2014, he attracted a lot of investors and quickly raised assets under management to billions of pounds. Due to the large number of investors, the Woodford fallout has attracted a lot of media attention.
☞ What can be learnt?
The importance of ongoing research
Most investments have a good time to own them and a bad time.
Those that have full time employees dedicated to investment research, such as ourselves and the multi-managers/private banks etc.…mentioned earlier, stand a better chance of identifying in advance when a fund manager is taking unacceptable risks. They have access to better research systems and time to spend reviewing fund managers to spot warning signs in advance. In Woodford’s case, the redemptions that started in late 2016 and continued throughout 2017 and 2018 whilst he continued to buy unlisted equities – was that warning sign.
This is where being a DIY investor can prove to be a false economy. By not paying for a wealth manager to look after your investments, the responsibility for doing this research (and the workload) falls back on the DIY investor.
Daily dealing funds need liquid underlying holdings
What do we mean by ‘liquid’? It’s an expression used to describe how easy it is to buy or sell an investment without having a meaningful impact on the price.
An example of an illiquid investment would be a small or unlisted company. To buy or sell a large amount (in £ terms) would move the price significantly as a large percentage of its ownership changed hands.
When funds offer daily dealing, it can create a mismatch between what they promise (the ability to withdraw your money on any given day) and what they have the ability to do. For example, the property funds investing directly into commercial real estate. Investors must understand these risks before investing.
The Woodford fallout will continue for some time due to the difficulty in selling out of the unlisted positions. Investors face a waiting period measured in months before they will get their investment returned.
In my view the situation came about, because of a number of factors. The governance from Link Fund Solutions was poor. The fund manager placed too much faith in unlisted equities and was too slow to cut these positions when outflows started in 2017. Once the initial suspension happened, the amount of media attention made it very difficult for the fund manager to ever rescue the situation.
For DIY investors, it highlights the risks of doing it yourself. The warning signs were there, but you had to be doing the ongoing monitoring and research to see them. This is what wealth managers/advisers should be there for.
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