Woodford Equity Income Fund Suspension – Analysis and Solutions

The business media is awash with analysis and comment on the closure of the Woodford Equity Income Fund to redemptions – meaning investors cannot take their money out, much to their dismay. I write as an innocent bystander as I have never held any of the Woodford managed funds.

But I have not been totally unaffected by the problem of investors taking their money out, which has led to the suspension, because it has resulted in Woodford needing to sell some of the fund holdings. One of the few companies in his portfolio I hold, and have done for a long time, is Paypoint (PAY). The share price of that company fell in the last 2 days probably because Woodford has been selling it – about 1% of the company yesterday for example reported in an RNS announcement. Paypoint share price has been rising recently so this looks like a case of selling a winner rather than a loser, which is never a good investment strategy.

Standing back and looking at the Woodford Equity Income Fund, even its name seems quite inappropriate. Income funds tend to be stacked up with high dividend paying, defensive stocks. But many of the holdings in the portfolio look very speculative and many pay no dividends. These are the top ten holdings last reported:

Barratt Developments (7.5%), Burford Capital (5.8%), Taylor Wimpey (5.4%), Provident Financial (4.8%), Theravance Biopharma (4.7%), Benevolent AI (4.5%), IP Group (3.3%), Autolus (3.1%), Countryside Properties (3.1%) and Oxford Nanopore (2.6%). Other holdings are Kier (recent profit warning dropped the share price by 40%), NewRiver Reit (I sold it from my portfolio in early 2018 as I could not see how it could avoid the fall out on the High Street), Purplebricks (a speculation which I held briefly but concluded it was unlikely to succeed and was grossly overvalued) and Imperial Brands (a bet on a product which kills people). He is also stacked up with house building companies and estate agents – a sector that many people have exited from including me as house prices look unsustainable with the threat of higher interest rates. However you look at it, the Woodford portfolio is contrarian in the extreme. It even includes some unlisted companies which are totally illiquid and not good holdings for an open-ended fund where investor redemptions force share sales.

The last time big funds closed to redemptions were in the property sector where owning buildings in a downturn showed that the structure of open-funded funds was simply inappropriate for certain types of holdings. Much better to have those in an investment trust where fund investor sales do not force portfolio sales on the manager.

Note that another reason I prefer Investment Trusts to Open-Ended Funds is that they have independent directors who can, and do occasionally, fire the fund manager if things are obviously going wrong.

Part of the problem has been that despite the poor performance of the Woodford Equity Income Fund over the last 3 years (minus 17% versus plus 23% for the IA UK All Companies Index, and ranked 248 out of 248!), platforms such as Hargreaves Lansdown and wealth advisors were still promoting the fund based on Woodford’s historic reputation at Invesco. So investors have been sucked in, or stayed in on the promise of the fund’s investment bets coming good in due course.

What should be done about the problem now? That’s undoubtedly the key concern for investors in the fund. Even if the fund re-opens to redemptions, folks will still want out because they will have lost confidence in Woodford as a fund manager.

It has been suggested in the media that investors might be pacified if fund management fees were waived for a period of time. But that’s just a token gesture to my mind.

I would suggest some other alternatives: 1) That Neil Woodford appoint someone else to manage the fund – either an external fund management firm or a new fund management team and leader. Neil Woodford needs to withdraw from acting as fund manager and preferably remove his name from the fund; 2) Alternatively that a fund wind-up is announced in a planned manner; 3) Or a takeover/merger with another fund be organised – but that would not be easy as the current portfolio is not one that anyone else would want.

One difficulty though is that with such large funds (and it’s still relatively large even after having shrunk considerably), changing the direction and holdings in the fund takes time. So there is unlikely to be any short-term pain relief for investors. Smaller investors should probably get out as soon as they can, but the big institutional investors may not find it so easy.

If readers have any other solutions, please comment.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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