Woodford Equity Income - what to expect now

Chris Hill | Thu 20 June 2019

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It’s just over two weeks since trading in the Woodford Equity Income Fund was suspended.

We understand how frustrating it is for those of you who have used our platform to invest in the Woodford fund and are currently unable to access your investment. Helping you through this process, learning lessons and applying them in a timely manner is our top priority.

We are talking with Woodford Investment Management, Link Asset Services (the fund’s Authorised Corporate Director) and the regulator, and are committed to keeping you up to date with the latest developments.

Here we explain what we’ve done so far, and what else we feel needs to be done to protect your interests.

What’s happening with my money?

Dealing in the fund remains suspended. Woodford Investment Management is working with Link to decide when the fund will open again.

It was Link who made the decision to suspend trading on the fund to protect existing investors. They are an independent company who act in the best interests of the fund’s investors in accordance with the Financial Conduct Authority’s regulations.

Woodford has said he will be using the time when trading is suspended to re-position the portfolio into more easily tradable stocks. Link will set a maximum limit for the unquoted part of the portfolio. The fund manager must sell off these unquoted stocks to fall under the limit before the fund can re-open.

Link is issuing a daily price for the fund, so you can track the value of your investment. Since the fund was last tradable on Friday 31 May, the value of the fund has fallen 5%.

What did we know?

For the first two and a half years from launch, the Woodford Equity Income Fund was among the top performers in the sector, but by the end of 2016 the fund started to underperform.

We had seen the fund manager displaying similar underperformance in 1999, but then bouncing back strongly to 2003 and again underperforming in 2009, rallying strongly to 2016. We believed he had the ability to do the same again.

Neil Woodford - career track record

Past performance is not a guide to the future. Source: Lipper IM and Hargreaves Lansdown to 31/05/2019.

The fund manager has a history of successfully investing in small and/or unquoted stocks through his time at Woodford Investment Management, and previously at Invesco Perpetual, dating back to at least 2001.

In November 2017, as part of our regular analysis, we identified an increase in the proportion of these small and unquoted assets in the Woodford Equity Income Fund. We met with Woodford that month and urged him to address the issue. He committed to us that he would make no new investments into unquoted businesses from that point.

We also recommended he reduce the early warning thresholds for his investments in unquoted companies, which he agreed to do.

We insisted that Woodford abide by the UCITS (Undertakings for Collective Investments in Transferable Securities) guidelines not to breach the 10% level and to inform us immediately if they did, to which they also agreed. Yesterday we found out that Woodford twice breached this limit, in February and March 2018. They did not inform us of this on either occasion.

We met Woodford in April this year to further discuss the detailed plan to remove the unquoted and illiquid element of the portfolio. He promised to remove the unquoted and illiquid element entirely, and to announce this publicly.

Woodford Investment Management confirmed these plans in more detail to clients in early May 2019 and announced their intention to sell all unquoted holdings. We believed this would return the fund to a more stable state and the public announcement would reduce pressure on Woodford, therefore reducing outflows.

On careful analysis of the situation, and taking a balanced view in the interests of clients, our investment team decided to maintain the fund’s position on our Wealth 50 list.

During the course of 2018, redemptions from the fund began to increase. This meant the manager sold more easily tradable stocks where he had the least conviction to meet demands for investors’ cash. This meant Woodford was unable to reduce the unquoted portion of the portfolio as quickly as possible.

Unfortunately, pressure continued to build and, after Kent County Council requested the redemption of £260m, Link decided to suspend dealing in the fund. We then took the decision to remove the fund from the Wealth 50.

What are we doing now?

On the afternoon of Tuesday 4 June, soon after the decision to suspend the fund was made, we decided to waive our charge to hold the Woodford Equity Income Fund. We urged Woodford to do the same for its fund management fees.

We still think Woodford should suspend collecting its fees while investors can’t access their investments. This is the right thing for them to do and we will continue to press them to do so.

Through our communications with Link and the regulator we are pushing for transparency around the value of the unquoted part of the fund’s portfolio, and insight into when the fund will re-open.

We will continue to put pressure on Woodford Investment Management to sell out of their unquoted stocks in the Woodford Equity Income Fund. We have also urged Woodford to consider alternative ways to release capital so that investors can get access to their money as soon as possible, while balancing the need to get a fair price for assets.

Our Helpdesk is on hand to support our clients through this challenging time, so that any enquiries about the fund suspension can be answered as quickly as possible.

The most important thing is that the Woodford Equity Income Fund reopens as soon as possible, while protecting the interests of investors and those who wish to sell their holdings.

We are angered by the lack of resolution so far but remain actively engaged with the regulator, Woodford, Link and the Treasury Select Committee to ensure that all investors, not just those invested through Hargreaves Lansdown, are able to access their investment as soon as possible.

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2019. N/A - Where no data is shown, figures are not available.