Woodford's share disposals hit market

However, regulatory disclosures in the days since point to a frantic period of share sales and transfers, following the loss of an investment management mandate from St James's Place (STJ) and efforts to convert existing holdings into more liquid assets. Early evidence suggests that the sales are adding pressure on the companies’ respective share prices, either through the transaction prices or because investors are aware there is a large seller in the market. 

Woodford Investment Management (WIM), which collectively manages all three of Woodford’s funds, has so far this month sold or transferred significant stakes in most of the London-listed stocks in the Equity Income Fund’s top 10 holdings.

The disposals include Barratt Developments (BDEV), which was the largest single holding in the fund at the end of April, making up 7.53 per cent of its then £4.33bn size. Housebuilders Taylor Wimpey (TW) and Countryside Properties (CSP) are among the fund’s other largest constituents to have announced Woodford share disposals in the days since the fund’s suspension.

In several cases – including Countryside, Barratt and IP Group – the disposals appear to be part of direct transfers to the unit trusts managed by St James’s Place, the wealth manager that abruptly cancelled £3.5bn-worth of mandates with WIM last week.

A spokesperson for WIM said: "This is categorically not a fire sale. Neil has sold £95m of stocks this week as he continues to reposition the £3.7bn Woodford Equity Income Fund portfolio.”

At the time of publication Mr Woodford had not sold down his holdings in Nasdaq-listed Therovance Biopharma (US:TBPH) and Autolus (AUTL), both of which occupy top 10 positions in the income fund. Stakes in two unquoted companies – Benevolent AI and Oxford Nanopore – are likely to prove trickier to liquidate.

In a letter to the Financial Times, Financial Conduct Authority chief executive Andrew Bailey has said that rules around open-ended investment funds may need to change in the wake of the fund’s suspension. “The Woodford fund points to a potential problem with the limits on illiquid assets: the purpose of these limits is to ensure that the fund remains liquid,” Mr Bailey wrote.

A WIM spokesperson said:  “As announced on 1 March 2019, our long-term intention is to not have any exposure to unquoted holdings in Woodford Equity Income Fund. Moving the exposure to the asset class via a collective vehicle rather than individual unquoted stocks makes sense and is in the interests of investors.”

This process is already under way and the proportion of unquoted assets will decline over the remainder of this year, the spokesperson added.

Liquidity squeeze

WEIF’s assets peaked at £10.2bn in May 2017 but had shrunk to just £3.7bn in June due to weak performance and investor redemptions. The fund had been forced to sell its more liquid holdings to meet those redemptions.

The fund's suspension will be reviewed after 28 days, although there is no fixed term. However, the FCA said in a statement: "A suspension should last no longer than necessary to allow the fund to build up sufficient liquidity to meet redemptions again.”

Philip Warland, a governance expert that advises UK fund boards, said Mr Woodford would need to take a conservative approach when assessing the liquidity of the fund’s holdings before reopening trading, given the likelihood of further redemptions. That is particularly true given the level of retail investors in the fund. “He can go to Hargreaves Lansdown through which quite a lot of money has come, but Hargreaves Lansdown cannot predict how their investors are going to behave,” he said.

Chair of the Treasury Select Committee Nicky Morgan has written to the FCA to clarify what supervisory work the regulator has conducted with the fund. Mr Bailey is set to appear before the committee on 25 June. 

Following the loss of the St James's Place mandate, WIM’s stake in doorstep lender Provident Financial (PFG), another top 10 holding in the Equity Income Fund, reduced from 23.4 to 18.4 per cent. WIM was one of three investors that collectively held just over 50 per cent in Provident, and which backed NSF chief executive John van Kuffeler in his hostile bid. With WIM’s stake now reduced, NSF no longer has a majority backing, should it choose to make a second bid.

Investors reacted positively to the deal’s failure, pushing Provident shares up by as much as 16 per cent. However, most of the stocks Woodford has sold down have also seen drops in their share prices in the past week.

So have core holdings that are yet to be disposed of. Litigation finance specialist Burford Capital (BUR), which at the time of writing had not disclosed a decrease in the 9.5 per cent of its shares WIM owns, nonetheless saw its shares fall on the news of the Equity Income Fund suspension.

However, there could be good reason for holding on to the Alternative Investment Market darling, whose market value has trebled in value over the past three years. In that time pre-tax profits have risen by around the same proportion, as management has demonstrated a canny ability for backing cases that have generated impressive returns, coming in at 85 per cent in 2018.

Many other holdings have fared far worse. Just hours before the Equity Income Fund’s suspension, Kier Group (KIE) issued a profit warning that wiped around 40 per cent off the construction group’s market value in just one day. The news was symbolic of the poor performance of many of the fund’s major holdings over the past year and partly explains why the fund has come under such pressure from investors.

Jason Hollands, managing director at Bestinvest, said part of the reason for the fund’s poor performance lay in Mr Woodford’s decision to take a more contrarian approach to UK domestic-focused stocks in the aftermath of the referendum. “The portfolio was positioned towards areas like housebuilders in the belief that the UK economy was in a better shape than the consensus view,” he said.

Bestinvest downgraded the Woodford Equity Income Fund to one star in March 2018. “A lot of that was not just about performance…but around the shift into early-stage and illiquid companies,” said Mr Hollands.  

Shares in lossmaking Purplebricks (PURP) have fallen by almost 70 per cent over the past 12 months as the online estate agency has had to contend with sluggish UK and Australian housing markets and a disappointing response to its efforts to expand into the US, forcing it to lower revenue expectations for 2019. The group’s woes were compounded by the departure of founder and chief executive Michael Bruce in May. Since Mr Woodford disposed of 3.2 per cent of a stake that had sat at 28.9 per cent on 4 June, investors including ToscaFund and Merian Global Investors have topped up their holdings to 14.4 per cent and 16.6 per cent, respectively.   

Likewise, Crest Nicholson (CRST) has been hit by a weakening housing market in London and the south-east, which has forced it to sacrifice sales growth in order to protect cash flow and dividends.      

The scale of share selling in the month to date is a shift from May’s major dealings, when WIM made just three disposals large enough for the individual companies to disclose. In fact, the largest trades appeared to be purchases of stocks, including increased stakes in Card Factory (CARD) and Kier. 

Of these, the largest disposals appear to have been made to St James’s Place, which has inherited WIM stakes in aggregates company Breedon (BREE), used car outfit BCA Marketplace (BCA) and guarantor loans group Amigo Holdings (AMGO). In the latter two, Woodford has retained stakes worth 7.1 and 5.6 per cent, respectively, presumably reflecting their position across the remainder of Woodford’s proprietary funds.

This raises the question of how much cash WIM has been able to raise since the gating of its flagship fund. Many expect a wave of redemptions if the fund’s suspension is eventually lifted. Were Woodford to completely dispose of the companies in which disposals have already been disclosed, he could in theory bank another £1.3bn at prevailing market prices. Doing so is likely to be complicated by investors’ awareness of a forced seller in the market.

Already, there are some signs of selling pressure. Excluding the transfers made to STJ, many of the share prices of the stocks WIM has sold since 3 June have lost value. These include Paypoint (PAY), Watkin Jones (WJG) and Ten Entertainment Group (TEG), although the period has seen gains for Purplebricks and housebuilder Redrow (RDW).

However, some disposals could have created a value opportunity for investors. While Countryside Properties' exposure to the housebuilding industry has weakened sentiment towards the shares, which have lagged the sector average and trade at a discount to their two-year average – as well as peers – at just eight times forward earnings. Yet increasing exposure to urban regeneration of public sector land has helped insulate it from the slowdown in sales suffered by many traditional housebuilders. Meanwhile, strong cash generation enabled management to boost the dividend payout rate to 40 per cent of adjusted earnings, from 30 per cent.

We also remain bullish on Watkin Jones, a construction company specialising in purpose-built student accommodation and private rented housing. Despite the shares generating an average annualised return of 35 per cent since IPO in 2016, they are trading at a discount to their two-year average. Analysts at Equity Development estimate that Watkin Jones will produce an impressive 44 per cent ungeared return on equity from its asset-light business model this year.

Hargreaves continues to drop

Over the past week, selling pressure hasn’t been confined to the stocks and funds owned and managed by WIM. Fund supermarket and long-time Woodford backer Hargreaves Lansdown (HL.) has seen its shares drop by around 15 per cent to £18.50 since the Equity Income Fund’s suspension.

The fund was among those held in Hargreaves’ multi-manager funds, and was included in its 'Wealth 50 list' up until its gating. Critics have suggested Hargreaves’ promotion of Woodford’s funds via its platform created a conflict of interest, casting light on the independence of the fund management market.

On Sunday, chief executive Chris Hill issued a personal apology to customers who had been affected by what he called “the recent problems with the Woodford Equity Income Fund”, and said the company would review this “specific situation to ensure we learn from it”. However, Mr Hill defended the Wealth 50 list, in which both of Mr Woodford’s equity funds were listed until a week ago, arguing that “the shortcomings of one fund should not detract” from its benefits.

Were Mr Woodford to completely dispose of the companies in which disposals have already been disclosed, he could, in theory, bank another £1.3bn at prevailing market prices

Analysts at Numis sought to reassure investors in Hargreaves, suggesting the Equity Income Fund’s closure will be “minimal in a group context”, or between £400,000 and £450,000 a month.

However, the broker skated over the broader issue of reputational damage, which has arguably exacerbated given the timing of a series of share sales by prominent figures at the firm. These include research director Mark Dampier and his wife, who sold £5.6m-worth of shares at £23.92p each on 16 May, the same day chief investment officer Lee Gardhouse disposed of £0.55m-worth of stock acquired under a long-term incentive plan.

Last month, it was also disclosed that co-founder Stephen Lansdown had reduced his stake from 10.89 to 9.3 per cent on 22 May. Assuming the shares were sold at the prevailing trading price of £22.92 each, that would have netted Mr Lansdown more than £180m.

*This article has been corrected to reflect the fact that shares with a value of £97.2m have been sold, which does not include IP Group