What LF Woodford Equity Income's suspension means for you

Neil Woodford, manager of  LF Woodford Equity Income Fund (GB00BLRZQB71), said in a statement issued on 4 June: “Fundamentally the strategy remains the same: investors money is preserved in the assets in which we’ve invested and the portfolio continues to work for our investors.”

You can watch Mr Woodford’s full statement here

The suspension will be reviewed at least every 28 days.

If you have a direct debit set up to automatically invest in the fund every month you will not have your investment processed this month, as you cannot purchase or sell shares until the suspension is lifted. You should check with your investment platform or financial adviser on what exactly will happen to your direct debit payments, but in many cases it is likely that your money will be collected as usual and held in cash. Any buy or sell orders placed after midday on 31 May 2019 have been rejected.

Best option in the circumstances

Suspending trading in LF Woodford Equity Income is probably the best option for its investors as it means its investment team will have the chance to try to sell assets for a decent price, rather than as fast as possible at any price.

“While it will be worrying for investors and frustrating for those that would like to access their money, it has been done for their benefit,” said Darius McDermott, managing director of broker Chelsea Financial Services. “Neil Woodford is probably the most well-known fund manager in the UK and, over more than three decades, has produced good returns, so has a loyal following. However, over the past couple of years, the performance of LF Woodford Equity Income fund in particular has been disappointing. Over the past 12 months, the value of the fund has fallen about 18 per cent. This underperformance has been due to a number of factors.

"Firstly, Neil's style has been out of favour. He holds many unloved and undervalued UK companies, which are domestic-facing. But as Brexit drags on and on, they are not being given the opportunity to recover. There have also been a number of stock-specific issues. The knock-on effect is that the fund has suffered large redemptions, as many investors have taken their money elsewhere. This, in turn, has meant Neil has been a forced seller of some of his stocks, even if they have done well, to meet those redemptions. It's a vicious circle.

"But I would urge investors not to panic. The suspension of trading is in the interest of investors, so manager Neil Woodford is not forced to sell holdings quickly, at a lower price.”

Mr Woodford is focusing on placing the unquoted holdings in the fund with interested buyers and removing these kinds of holdings from LF Woodford Equity Income completely. He will reinvest the proceeds in more liquid investments. “The suspension of dealing in the fund enables us, and gives us the time and space to execute that strategy, to reduce our exposure and redeploy that capital into more liquid stocks in the FTSE 350 - but primarily in the FTSE 100 - that fit in with my core strategy but which are more liquid and more conventional.”

The domestic-facing shares LF Woodford Equity Income holds could rally if sentiment improves, for example, because of a soft Brexit or no Brexit. 

But if more investors want to take their money out of the fund after it reopens then these holdings may not have a chance to come to fruition because they have to be sold, and in the worst case it could mean the fund having to be wound up.

“The suspension is likely to result in further outflow requests once the fund reopens, putting more pressure on Woodford,” says Adrian Lowcock, head of personal investing at broker Willis Owen. “But it does give him time to find a solution and restructure the portfolio to be suitable for the current climate. This would be likely to impact performance of the fund in the short and medium term.”

One of the other funds run by Woodford Investment Management, LF Woodford Income Focus (GB00BD9X7109), remains open. “It’s a different portfolio - it doesn’t have any exposure to illiquid or unquoted securities, and consequently isn’t exposed to the same issues that LF Woodford Equity Income Fund is,” said Mr Woodford. “And [it] is positioned, I believe, for the economic and market environment that we are likely to see over the medium and long term.”

Following the announcement that LF Woodford Equity Income would suspend trading, another fund run by Woodford Investment Management, Woodford Patient Capital Trust (WPCT), experienced a steep share price fall from around 76.5p at close on 3 June to around 60p the following morning, although over the course of Tuesday it moved back up to 71p. This put it on a discount to net asset value (NAV) of 20.3 per cent – out from 14.6 per cent at close on 3 June.

Investors may have been concerned because it holds some of the same stocks as LF Woodford Equity Income fund and their share prices could be depressed by selling. Iain Scouller, managing director, investment funds research at broker Stifel, estimates that 25.5 per cent of Woodford Patient Capital Trust's NAV is in listed companies that were also constituents of LF Woodford Equity Income as at 30 April. Unquoted investments that overlap with LF Woodford Equity Income accounted for 64.2 per cent of Woodford Patient Capital Trust’s NAV.

And LF Woodford Equity Income holds 8.98 per cent of Woodford Patient Capital Trust's shares, a stake worth around £74m as of 31 May. If LF Woodford Equity Income sold this stake it could have a negative affect on the trust’s share price. But this is not expected as it is intended that LF Woodford Equity Income will be a long-term shareholder in Woodford Patient Capital Trust.

Quoted investments owned by LF Woodford Equity Income and Woodford Patient Capital Trust as at 30 April 2019

See also: 

LF Woodford Equity Income suspends trading

Woodford fallout spreads to Hargreaves Lansdown