Until recently, Neil Woodford was among the UK’s most feted fund managers. Investors flocked to this revered stock-picker who combined holdings in large dividend-paying firms with growth companies from the FTSE250 to generate income streams from his vehicles that were a siren call to retirees in particular.
Disaster then struck at the beginning of this month when Woodford was forced to suspend dealing in his flagship Equity Income fund, which was once worth over £10bn but has since plummeted to £3.7bn (as at 11 June). This spectacular fall from grace and the knowledge that their money is now locked into a faltering fund will have left many investors reeling.
DIY investors may well feel particularly distressed given that Woodford’s fund appeared to be recommended by some of the biggest self-directed investment platforms in the industry. Relatedly, many investors could be exposed unknowingly through multi-manager funds which have in turn invested in the now-stalled vehicle.
We’ve seen a big spike in enquiries from DIY investors desperate to know what’s going on and what they should do. So, here is what you need to know if you are invested in the Equity Income fund.
At root, the biggest failure in fund management history was down to Woodford holding a significant number of small companies that were illiquid – meaning difficult to trade – or even unlisted. Importantly, the regulator has set down a 10% limit on the proportion of unlisted holdings a fund may have.
A second important point is that the fund was open-ended, meaning that when investors wanted to take money out then the cash for these “redemptions” would have to come from selling the fund’s holdings – and that in reality the more liquid ones would have to be first to go.
When investors began to lose faith in Woodford, a chain reaction was set in motion. As the fund sold off liquid holdings to meet redemptions, the fund became increasingly heavy on illiquid ones, causing ever more investors to run for the exit. Soon, the fund’s portfolio became so unbalanced and close to breaching the regulator’s limit on unlisted holdings that there was no option but for the fund to be “gated”, stopping further withdrawals in order to create the time needed to sell illiquid assets and meet redemptions (it is thought that several hundreds of millions is required).
At the time of writing, all trading in the Equity Income fund has been suspended until further notice, with that suspension being reviewed at least every 28 days. There will therefore be no chance for investors to pull their money out until July at the earliest.
Investors in the fund still own units in it as before. The question at stake is what those units will be worth once the fund is ungated, and this of course hinges on the share prices of the fund’s remaining holdings.
Controversially, since the fund is technically still being actively managed while gated, management fees will continue to be levied (although at least one platform has committed to waiving its fees for the time being).
It is impossible to predict what will happen to its valuation when trading in the Equity Income fund recommences, although it seems certain that many investors will feel sufficiently spooked to just want to get out irrespective, and this could could damage the share prices of the underlying companies it holds.
A lot can happen in a month, however, and we can be sure that frenzied work is ongoing to restructure the fund and protect value for investors. There is also a chance that the value of its holdings may have actually risen in value during the suspension of trading (a suspension of listing, on the other hand, generally does destroy investor value).
In short, things could go either way, but investors will have to decide soon whether they will be pulling out their money at the earliest opportunity or hunkering down to see if Woodford can resurrect his flagship fund.
These are decisions that will have to be made on a case-by-case basis as everyone’s circumstances (and other investments) will vary. If you have invested a significant amount of money, it is imperative that you take professional advice – particularly if you are someone in or approaching retirement and so has less time to recoup losses. You can be connected to well-matched advisers quickly, easily and free of charge through our smart tool’s 3-minute search.
This is all a stark reminder that, as the warnings say, past performance is no guarantee of future success. And, as many may learn to their cost, allocating too much of your portfolio to a star name manager is seldom a good idea. Research indicates that top-performing funds generally have had their day in terms of growth potential by the time they reach top buy lists. Genius can slip into hubris and characteristics that were strengths (in this case transparency over holdings) can become weaknesses (short sellers using this information).
Constructing a well-diversified portfolio that is weighted appropriately to asset classes, regions and instruments in line with your risk-profile is the only way to properly manage risk and, in the long term, get the best returns.
Constructing a well-diversified portfolio that is weighted appropriately to asset classes, regions and instruments in line with your risk-profile is the only way to properly manage risk and, in the long term, get the best returns
Liquidity is something DIY investors also tend to forget. Whatever the instrument, it is the ease with which the underlying assets could be sold that should concern you. Property funds are a case in point and these went through a round of suspensions as investors tried to stampede out after the Brexit vote.
It should also be noted that although its price has tumbled, Woodford’s Patient Capital investment trust has not suffered the same suspension fate as its sister fund due to the fact that these vehicles aren’t forced to sell assets to cover withdrawals (exiting investors simply sell to new ones). Investment trusts are arguably the better instrument for expressing a view in illiquid assets, like property or stocks that aren’t readily sold. These are the kinds of nuances that a professional wealth manager will not miss.
Investment trusts are arguably the better instrument for expressing a view in illiquid assets, like property or stocks that aren’t readily sold. These are the kinds of nuances that a professional wealth manager will not miss
The real lesson, however, is how important it is to give your investments a regular “MOT” to ensure that they have not become dangerously overweight in any one asset class, sector, market or – as we have seen – fund. It is all too easy to have hidden replications in fund-focused portfolios, so letting a professional cast an eye over your holdings to make sure they match your objectives could be a very wise move.
If you have been managing your own portfolio and now feel that some professional advice is in order, let us introduce to a shortlist of best-matched providers by providing a few details in complete confidence. Meeting to discuss your needs costs nothing and may help you avoid some very costly mistakes in future.