Neil Woodford is one of the most well-known fund managers in the UK. His company, Woodford Investment Management had over £10 billion in assets under management at its peak.
Woodford’s performance attracted the support of huge wealth management firms such as Hargreaves Lansdowne and St James’s Place, both of which have now withdrawn their support for the fund, although their clients who invested in the fund will be left dealing with the poor situation they now find themselves in.
The problems for Woodford began with a period of bad performance in its Woodford Equity Income fund, which lost around 30% from its peak; wiping out all the gains it had made since its inception. This was partly thanks to some big positions in companies he believed were undervalued as a result of Brexit.
Run on the Fund
As the performance began to suffer, investors began to get worried and started withdrawing their money from the fund. This was similar to a ‘run on the bank’ where depositors withdraw their money from a bank when there are signs of trouble, leaving the bank with liquidity issues. The ‘run on the fund’ for Woodford led to their funds being reduced from over £10 billion to around £3.7 billion. Although part of that decrease is due to a reduction in value due to poor performance too.
In just the past month the fund has decreased by £600m. This has led to Woodford completely freezing any withdrawals from funds and stopping anyone from taking their money.
One of the big issues for Woodford was the type of holdings that the fund had. They held a lot of small-cap and unquoted stocks which are very illiquid, meaning it’s not easy to sell them.
As the run on the fund began, Woodford needed to sell the more liquid holdings so they had enough cash to pay out to investors making withdrawals. As a result of this, the balance between the small-cap or early-stage stocks compared to the liquid, more established holdings began to suffer. The proportion of riskier, illiquid stocks was becoming too high.
This is what has eventually prompted Woodford to freeze the fund, so there is enough time to sell illiquid positions.
In a video statement to investors, Woodford said:
“The suspension provides us with the time to execute the strategy that we’ve communicated to our investors. And just to remind you, that strategy is about reducing the fund’s exposure to illiquids and unquoteds down to zero. That process is underway and is continuing, but was made much more difficult by the outflow that we were witnessing.”
The FCA is said to be monitoring the situation closely and it has also gained the interest of MPs who are likely to scrutinise the situation. One of the criticisms is about holding such illiquid stocks in an open-ended fund, which means there is a mismatch in terms of the fund's liquidity. Since the FCA is watching this and trading has been suspended, it’s likely that issues with the fund exist that are likely to get picked apart.
It’s safe to say, this isn’t the last we’ll be hearing of this.