Trading in LF Woodford Equity Income Fund (GB00BLRZQB71) has been suspended due to an increase in the amounts of money investors were pulling out of the fund.
Link Fund Solutions, the fund’s authorised corporate director, stated: “In conjunction with Woodford Investment Management, the investment manager, we have come to the conclusion it is in the best interests of all investors in the fund to suspend the issue, cancellation, sale, redemption and transfer of shares in the fund. Following an increased level of redemptions, this period of suspension is intended to protect the investors in the fund by allowing Woodford Investment Management, as previously communicated to investors, time to reposition the element of the fund’s portfolio invested in unquoted and less liquid stocks, into more liquid investments.”
Link Fund Solutions and Woodford Investment Management did not say how long the suspension will last.
Investors have been withdrawing money from the fund for a while following poor performance and removals from various broker buy lists.
The fund got off to a good start in its first full calendar year in 2015, with a return of 16.27 per cent, against 0.98 per cent for the FTSE All-Share index and the Investment Association (IA) UK Equity Income sector average of 6.2 per cent. But it underperformed these in 2016, 2017 and 2018, and in year-to-date 2019, so its cumulative figures do not look good – the fund made double-digit negative returns over one and three years.
Between its launch in June 2014 and early 2017 the fund grew to around £10bn in size. But since then it has steadily declined and by the end of May this year it only had assets worth about £3.7bn, according to data company Morningstar.
The fund also holds a number of unquoted investments, which are usually not able to be disposed of as quickly as quoted shares. These were never intended to account for a substantial portion of its assets, but became a greater proportion as the fund shrank in size over the past couple of years as investors pulled out their money and manager Neil Woodford sold some of the fund’s quoted equity holdings to meet these redemptions. The share prices of some of the remaining quoted equity holdings also decreased at the same time as the valuations of unquoted holdings increased.
Mr Woodford and his investment team have been trying to reduce the number of unquoted investments to stay within the regulatory limit of 10 per cent of its assets. In March, for example, the fund sold its stakes in five unquoted holdings worth £72.9m to Woodford Patient Capital Trust (WPCT), which is also run by Woodford Investment Management, in exchange for shares in that trust worth 9 per cent of its market cap at the time. This reduced LF Woodford Equity Income's exposure to unquoted investments from around 9 per cent to under 8 per cent of its assets. Mr Woodford had planned to reduce this further by transferring more capital to Woodford Patient Capital Trust, and through corporate events such as initial public offerings and takeovers.
“With an element of LF Woodford Equity Income in illiquid investments, it is clear that it was having to sell the more liquid holdings to meet the redemptions, which in turn can exacerbate the problem,” said Ryan Hughes, head of active portfolios at broker AJ Bell.
Many also questioned Woodford’s decision to list some of the fund’s assets on the stock exchange in Guernsey in an attempt to keep down the unlisted holdings element. The Financial Conduct Authority (FCA) says it was not informed of this and would not in any case have expected to be told. It says where it believes there has been serious misconduct or non-compliance with the rules, it may open an investigation.
In the 5 April issue of Investors Chronicle, we highlighted some of our concerns around the stock composition and poor investment choices of the fund - Should you stick with LF Woodford Income?.
Suspending trading in funds largely focused on mainstream equities is virtually unheard of. But it happened to funds that were invested directly in commercial property in 2008 during the financial crisis and in 2016 following the UK’s vote to leave the European Union. In both 2008 and 2016, however, the funds reopened within a few months of suspending trading.
Because of this, some argue that it is better to invest in unlisted, illiquid assets such as property and private equity via investment trusts. Investors in these types of funds cannot ask the managers to give them back their money when they want to pull out. To dispose of a holding in an investment trust you have to sell your shares in it on the secondary market. This means there are not flows in and out of the investment trust so it does not have to sell holdings to meet investor redemptions.
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