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Woodford Equity Income Fund Wind-up Blog

 

You may have seen in the news yesterday (15/10/2019), Neil Woodford’s flagship fund, namely the Woodford Equity Income fund is to be wound up with effect from 17/01/2020.

Background

Neil Woodford has been a star of the investment world for years, a contrarian fund manager. When every fund manager bought into Tech stocks in the late 1990’s, Woodford didn’t. His fund was at the bottom of the pile – 4th quartile. Then the tech bubble burst and Woodford was the best UK Equity Income fund manager – his fund jumped to the top of the league.

It was announced in June 2019 that due to large requests from investors to redeem their capital and underlying liquidity issues within the fund, a decision was made to suspend the fund for future trades. The underlying aim of this action was to allow Mr Woodford some time to generate the capital required in order to meet investors’ demands for their capital back. This was to be achieved by repositioning the underlying investment holdings of the fund into more liquid assets/shares.

It was thought that the fund could be suspended until December 2019 or January 2020. However, following intervention from the fund’s custodian, Link Fund Solutions (who runs the fund on Mr Woodford’s behalf), they have now decided to wind up the fund completely.

What does this mean?

Essentially, the fund custodian (Link Fund Solutions) did not feel the action undertaken by Mr Woodford during the interim period (the fund suspension) was sufficient for investors interests and they have stepped-in, in an attempt to help investors, get their capital back quickly. Subsequently, Neil Woodford has now been removed as investment manager of the fund.

Link Fund Solutions Approach

Link Fund Solutions released a statement, which said: “After careful consideration, the decision has now been taken not to reopen the fund and instead to wind it up as soon as practicable. This is with a view to returning cash to investors at the earliest opportunity”.

 

The Regulator (the Financial Conduct Authority (FCA) View

Following the announcement to wind the fund up, the FCA has welcomed ‘the removal of uncertainty’ that Link’s decision has provided, adding, ‘We recognise that investors have been concerned about the state of their investment since the beginning of June’.

‘Winding up the fund will allow the return of money to investors through a number of distributions, which are likely to begin in January 2020. This means investors should receive some of their money back sooner than had the fund remained suspended’.

What is Mr Woodford’s opinion?

Mr Woodford categorically believes that Link Fund Solutions have made a mistake in their decision to suspend the fund, stating ‘This was Link’s decision and one I cannot accept, nor believe is in the best interest of LF Woodford Equity Income fund investors’.

 

What happens now?

Link have confirmed that during the interim period, the fund will continue with its repositioning, but with the aim of preparing the portfolio to be wound-up, after taking into account any liabilities the fund owes. The proceeds of an orderly realisation of the Fund’s assets will be returned to investors in a series of capital distributions.

The portfolio will be split into two portfolios:

Portfolio A: Which comprises the listed stocks and its winding up period will be overseen by    BlackRock Advisers (UK) Ltd; and

Portfolio B: Which comprises the unlisted assets and be overseen by PJT Partners (UK) Ltd during the winding up process

The assets under this portfolio are less liquid and will be sold over time in an orderly manner in order to attempt to minimise loss of value. It is fair to say that this portion of the portfolio will take longer to sell given the nature of the underlying investments which could ultimately delay the process of you regaining your capital.

Link have stated that they expect the first capital distribution to be made to investors by the end of January 2020, but this will depend on how quickly the value of the Fund’s assets can be realised.

Was this the right decision?

It’s a fine line, with good arguments for both camps, but, ultimately, I believe Link’s decision to wind up the fund to be a good logical outcome. My rationale behind this is as follows:

  • As the FCA have stated, it removes the ongoing uncertainty surrounding the fund i.e. when will the fund be reopened? And, could the fund be suspended again if there were mass outflows, if so, how long would that suspension last?
  • The repositioning of the underlying assets that make up the fund go against Woodford’s normal investment philosophy (a contrarian investment approach)
    • With the fund moving to larger cap (FTSE 100) stocks, it is likely to be more appropriate to invest in a fund that solely focuses on this market sector and has a good track record in this area

A major factor that will ultimately prove if this was the correct decision will be to see how the sale of assets under Portfolio B are handled. It is important that these assets are not just sold at a lower value to raise capital, as this would impact on the amount of capital investors get back. It is important that PJT Partners (UK) Ltd take their time in negotiations in order to attempt to get the true worth of the underlying assets held within the portfolio, which they have indicated they will do.

 

 

Carl Mitchell

16/10/2019