LF Woodford Equity Income Fund (GB00BLRZQB71) is to be liquidated and Woodford Investment Management has, with immediate effect, ceased to be the investment manager of the fund. The fund's authorised corporate director (ACD), Link Fund Solutions, had indicated that the fund would be reopened in early December. But in an update on 15 October Link said that it had decided not to re-open the fund, which has been suspended from trading since 3 June, and instead to wind it up as soon as practicable with a view to returning cash to investors at the earliest opportunity. The fund will also be renamed as LF Equity Income.
Link said it has decided to wind up the fund because although progress has been made in relation to repositioning its portfolio, it has not been sufficient to allow reasonable certainty as to when it would be fully achieved and the fund could be re-opened. "It was agreed that it would not be possible to reopen the fund until the sale of its unlisted and less liquid listed assets was completed," explained Link. "Failure to do so before the re-opening of the fund would risk a further suspension and unequal treatment of investors, particularly for those who continued to remain invested in the fund."
The winding up of the fund, which had assets worth around £3bn as of 14 October, will start on 17 January 2020 because Financial Conduct Authority (FCA) rules state that investors must be given three months notice before this can happen. "After we have taken account of any liabilities which the fund owes, and of the costs incurred in the winding up, we will begin a process of paying you your share of the proceeds of the realisation of its assets as soon as possible," said Link in a letter to the fund's investors. "This will be done by means of a number of capital distributions made to all investors in the fund. It is anticipated that the first capital distribution will be paid to you and all other investors by the end of January 2020. The size of this first capital distribution will depend upon how quickly the value of the fund’s assets can be realised."
Link has appointed BlackRock Advisors to sell the fund’s listed assets, and PJT Partners, the specialist broker which has been helping Link to sell the fund’s unlisted and highly illiquid listed assets since the suspension, will continue to do this. Fees will be paid to BlackRock and PJT Partners but Link will not take a fee for acting as ACD since the fund’s suspension.
“After we have taken account of any liabilities which the fund owes, and of the costs incurred in the winding up, we will begin a process of paying you your share of the proceeds of the realisation of its assets as soon as possible," said Link. "This will be done by means of a number of capital distributions made to all investors in the fund.”
Link acknowledged the decision to close the fund will come as a disappointment for some but argued it would be in the best interests of those holding the fund because it would allow their money to be returned more quickly than under the original plans to reopen later this year. “We had agreed….that we would seek to complete the repositioning of the fund’s portfolio by early December 2019 to enable the fund to reopen, but that we would monitor progress to ensure that this date remained achievable,” said Link.
The suspension was intended to give manager Neil Woodford time to sell assets and reposition the portfolio to meet substantial redemption requests from investors. This involved moving entirely away from unlisted assets, which have at times breached a regulatory limit of 10 per cent of the fund’s assets.
The FCA said that it "welcomes the removal of uncertainty that Link’s decision provides. We recognise that investors have been concerned about the state of their investment since the beginning of June. This [decision] means that investors should receive some of their money back sooner than if the fund remained suspended for a longer period.”
However, Darius McDermott, managing director of Chelsea Financial Services, questioned the logic behind Link's decision to wind up the fund. “At the end of the day the most important thing is whether this is a better outcome for investors," he said. "Link suggests that investors will get their money back faster than if they waited for the fund to reopen, but I’m not convinced that is the case - December had been earmarked for a re-opening of the fund. This action also makes Woodford a forced seller of all stocks – stocks that the marketplace and short-sellers are all aware of. It may well mean that less money is returned to investors, so the jury is still out on this one.”
Some of the fund's assets are likely to prove difficult to sell quickly. A Link analysis outlined in the table below estimated that at the end of April 2019 around a third of LF Woodford Equity Income's portfolio would take at least 181 days to sell.
| Expected number of days needed to trade assets | Proportion of fund represented by these assets on 30 April 2019 (%) |
| 1-7 | 8 |
| 8-30 | 29 |
| 31-180 | 32 |
| 181-365 or longer | 33 |
Source: FCA |
Mr McDermott also questioned the rationale behind the timing of the decision, with Brexit "possibly just days away". However, a fund selling assets with the intention of reopening in December would also be likely to be subject to the same market conditions.
LF Woodford Equity Income launched in 2014 and soon amassed assets of more than £10bn, in part because of Mr Woodford’s previous success as an equity income manager. It performed strongly during 2015 but underperformed thereafter. The fund lost 31.38 per cent over the year to the end of September 2019, while the Investment Association (IA) UK All Companies and UK Equity Income sector averages were a flat return. Over five years to the end of September the fund is down nearly 19 per cent.
The other funds run by Mr Woodford have also been through challenging times. LF Woodford Income Focus (GB00BD9X7109), an open-ended fund which seeks to generate a higher income than LF Woodford Equity Income, has also under performed and been subject to investor redemptions. It had assets worth around £258m at the end of August.
Mr Woodford may also lose the management contract for Woodford Patient Capital Trust (WPCT). Following the suspension of LF Woodford Equity Income, the trust’s board is considering appointing another investment manager to run its portfolio. Following the announcement that LF Woodford Equity Income will be wound up Woodford Patient Capital Trust's board said: “As previously announced, [we have] been undertaking a review of the company's management arrangements and will make a further announcement in due course.
How best to hold illiquid assets
The debate about how best to hold illiquid assets in funds, ignited by the suspension of LF Woodford Equity Income, is likely to continue. The FCA recently outlined new rules for certain types of funds with significant exposure to illiquid assets but these mainly concern funds that do not comply with Undertakings for the Collective Investment in Transferable Securities (Ucits) rules, whereas most funds available to private UK investors are Ucits compliant.
The FCA said it would consider whether its rules on funds with significant exposure to illiquid assets should be applied more widely, and it and the Bank of England are assessing how funds’ redemption terms might be better aligned with the liquidity of their assets to minimise financial stability risks.
“For the Woodford debacle to have any positive outcome it must now serve as a catalyst for the FCA to speed up its review of its illiquid assets held in Ucits funds,” said Ryan Hughes, head of active portfolios at investment platform AJ Bell.
