Neil Woodford’s struggles were not fresh news but his fund being shuttered was a shock.
Investors who have stuck with Woodford’s Equity Income fund, including yours truly, are now locked in until an unspecified future date – in a move trailed as having been made to protect us.
The soap opera of Britain’s most famous fund manager’s travails has been a common topic when I’ve met up with investment industry types recently, but the idea that investors could imminently be barred from selling out has not.
Of course, it could happen, but it just doesn’t usually to names this big and funds that hold so much of savers’ cash, triggered by one manager’s poor performance.
Neil Woodford suspended trading on his flagship equity income fund to ‘protect investors’, so what happens next and will the move help them?
Mind you, massive outflows and poor performance mean that’s turned into a lot less of savers’ cash invested in the fund in recent times
Woodford’s flagship fund had sunk from about £10billion two years ago to £3.77billion before the shutters were pulled down – and with investors continuing to rush for the exit, the risk of a fire sale to pay them back intensified.
Furthermore, as Woodford is forced to sell down his big company holdings to repay investors, the fund gets even more skewed towards the smaller stock market-listed and unquoted companies that worry many.
This is one of the reasons why most of my Isa holdings are investment trusts, which cannot be forced to sell in the same way. Albeit, the price of their shares can sink to a big discount to the sum of their parts.
What next for Woodford investors?
So, what happens next?
In short, investors must now sit tight and wait for at least 28 days and they will eventually be told when they can buy in or sell out.
Investment trusts vs funds
Investment trusts’ structure, known as closed ended, means they are a fixed size and investors buy and sell shares in them to invest or withdraw money.
They have two prices quoted, their share price and their net asset value, representing the value each share is entitled to.
The share price can be either at a premium or discount to NAV, dependent on demand to buy in or sell out.
Investment funds, such as Woodford Equity Income, are open ended and must expand and shrink in size – buying and selling assets – as more money goes in or out.
This can lead to managers being forced to sell assets to meet withdrawals, or buy more than they may want to if demand to get in is high.
There is an argument this makes investment trusts better, particularly for investments hard to buy or sell.
In the meantime, the plan is for Woodford’s fund to use its breathing space to shuffle things about: shifting away from riskier smaller companies that can be harder to buy and sell, and back towards larger companies that a mega-fund such as this can get in and out of easier.
If this all goes to plan and Woodford gets a luckier break than the terrible run he’s had, then investors could find themselves up when the doors reopen.
Murphy’s Law says things may not go so smoothly.
On Monday, when Woodford’s fund went into lockdown, Kier – a company he owns a 20 per cent stake in – saw its shares tank 41 per cent on a profit warning.
Today there were rumblings that the fund’s problems may affect some of the smaller companies it invests in: their share prices will no longer be buoyed by having Woodford on the shareholder list, but dented by his presence.
Then there are the questions that hang over Woodford’s business itself.
After he left Invesco Perpetual, where he made his name, and started up Woodford Investment Management, it grew from a standing start to a highly profitable company.
So profitable, in fact, that earlier this year we revealed how Neil Woodford and business partner Craig Newman bagged a £36.5million payout last year.
With current goings on, is Woodford’s business plan still viable now and in the future?
All of this will come out in the wash – and if investors are fortunate, the fund’s investments will start going back up in value and being blocked from selling out will be good news.
Woodford’s Equity Income fund is down 17.5% over three years, whereas the average UK All Companies fund has risen 23.3% and fellow star fund Lindsell Train UK Equity is up 52.3%
What can we learn from Woodford’s fall?
At the moment there is much finger-pointing at those seen as having been cheerleaders for Woodford, ranging from investing platform giant Hargreaves Lansdown, to best buy fund lists, and us journalists.
Readers regularly lambast the press for writing too much about Woodford, even though he’s as close as UK investing gets to a household name, much of that coverage is critical, and it puts the fund manager under more scrutiny than almost any other.
Set aside the blame game though and there is a lesson to be learnt: pay attention to where your money is going and don’t put all your eggs in one basket.
Woodford’s strategy might have drifted, but he was transparent about his investments – listing them in full each month, and his struggles were well known.
I stuck with Woodford
Last month, Woodford outlined why he thought a Brexit deal would finally be done and his stock picking would come good.
In my column I looked at why I had stuck with my Woodford investment.
On reflection, I felt despite some glaring examples of poor judgement on his part, Woodford’s value investing stance would eventually be proved correct, but sticking with the Equity Income Fund was a mistake due to the missed opportunity to invest elsewhere.
With his Patient Capital Trust I was happier to do what it said on the tin and be patient.
I still feel that, but the trust does now risk being dragged into the mire and Patient Capital shares sunk today.
Some time ago, Woodford Equity Income was moved out of the income fund sector and into the UK All Companies sector.
Meanwhile, Hargreaves Lansdown’s decision to keep his fund in their revised Wealth 50 best buy funds list caused a huge kerfuffle.
There have been plenty of stories questioning whether his mega-fund is right to hold so much in start-ups and smaller companies.
Finally, a quick glance at the performance figures would show that the fund was doing badly and it might be time to reassess if Woodford’s strategy was right.
To put that in context, the Woodford Equity Income fund is down 17.5 per cent over the past three years, while the average UK All Companies fund is up 23.3 per cent.
Woodford is 40.8 per cent behind the average fund and a huge 69.8 per cent behind another star manager Nick Train’s Lindsell Train UK Equity fund.
Investors have a responsibility to be aware of these things and those who were unhappy had ample opportunity to get out before now.
Nonetheless, whether you hold Woodford’s funds or not, a wise move might be to use his high-profile tumble to do some spring cleaning.
Look at the other investments you hold and ask: do they still do what they are meant to, are they still right for me, and is there now a better place for my money?