Woodford Equity Income – SELL
Posted by: Brian Dennehy
Neil Woodford is under extreme pressure as the 4th anniversary of his first fund launch looms (in June). If you are invested into Woodford Equity Income you need to make a hard-nosed decision. Our view is that you should sell if you haven’t already, as the risks are growing for the fund.
Woodford Equity Income was launched in June 2014 to great fanfare. He was THE star fund manager, attracted huge sums, and in May 2017 the fund value peaked at massive £10.2 billion. On the second anniversary in 2016 we highlighted that the fund had performed well since launch but cautioned that “nonetheless investors shouldn’t use star-status as an excuse for not doing their homework regularly”.
We certainly carried on doing our homework, and it was clear by the third anniversary that things were going wrong. The fund was obviously losing momentum, and we highlighted that you could do better elsewhere.
In recent weeks the bad news has got worse.
The fund is allowed to hold up to 10% in unquoted securities, that is shares of companies not on the stock market with a known day to day price. This gives Neil the chance to explore opportunities, and apply his analytical skills, beyond the mainstream. But it can also cause problems.
According to the Financial Times* there were £1.2 billion of redemptions since May 2017. This, coupled with falls in the value of assets in the fund, meant the value of the fund fell from £10.2bn to £7.2bn.
To meet investor redemptions the fund will have to sell liquid (AKA easy to sell) listed holdings. As it does so it necessarily increases the weighting of its unlisted holdings. The regulations don’t allow more than 10% unlisted, and according the FT this rose to 9.69% in January.
The result is that Neil is close to having to sell some of his unquoted securities. The problem is that, unlike shares listed on the stock market, the value of the shares is a bit of an educated guess. And if you are a forced seller, as Neil would be, you are not going to get the best price.
The latter becomes a vicious circle if the fund continues to suffer redemptions from investors. This is even more so if the stock market suffers another downturn, as this will reduce the value of his quoted holdings and thereby increase the proportion in unquoted stocks – which means he might then be forced to sell more of the latter. A vicious circle.
It is well known that Jupiter sold a large chunk of Woodford Equity Income (£383 million), which concluded in September 2017 (though Jupiter have also retained a large volume). Where fund groups like Jupiter hold such large volumes in the Woodford fund, this could also add fuel to the fire if their sales gathered pace.
Where groups like Jupiter hold this fund, they do so within their fund of funds. Other so-called asset allocators (including discretionary accounts) tend to herd – this means if one or two sells, others will be inclined to follow. This was what happened in the days after Brexit as these asset allocators (rather stupidly) tried to sell illiquid property funds and took a large and unnecessary hit.
We do not know how the regulators will respond if the 10% limit is breached, and how much slack they will give Woodford Equity Income.
There is too much uncertainty surrounding Woodford Equity Income. I hate to add to Neil’s woes, but I see no good reason for individual investors to retain this fund.
* 28th February 2018