Woodford debacle: manager calls time on fund industry

Link Fund Solutions, authorised corporate director (ACD) on the suspended LF Woodford Equity Income Fund (GB00BLRZQB71), 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 reopen 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.

Mr Woodford responded on the same day by resigning as manager of both the Woodford Patient Capital (WPCT) investment trust, whose board had already been considering alternative investment firms, and the yield-oriented LF Woodford Income Focus (GB00BD9X7109) fund.

“We have taken the highly painful decision to close Woodford Investment Management. We will fulfil our fund management responsibilities to WPCT and the LF Woodford Income Focus fund and once completed will close the company in an orderly fashion,” Mr Woodford said.

“I personally deeply regret the impact events have had on individuals who placed their faith in Woodford Investment Management and invested in our funds.”

The board of WPCT, which saw its share price fall on the morning of 16 October, has said it is “in advanced discussions in relation to the ongoing management of the company’s portfolio and expects to be in a position to announce details of the new management arrangements shortly”. WIM has a three-month notice period as manager of the trust's portfolio.

Meanwhile Link has moved to suspend trading on the Income Focus fund, warning that redemptions in the fund “will reach a level whereby it may no longer be able to continue to meet redemption requests”. Updates on the suspension will be given at least once every 28 days. Link added that it would “consider the options available to us including the appointment of an alternate investment manager, a scheme of arrangement into another fund or a winding-up of the fund, and decide on the course of action that is in the best interests of all investors”.

“Whilst we consider these options, Woodford has committed to continue to work collaboratively with us in its capacity as the appointed investment manager of the fund,” the firm added.

LF Woodford Equity Income is to be liquidated and Woodford Investment Management has ceased to be the investment manager of the fund.

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 reopened. "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 that 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.

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.