What has happened to Neil Woodford’s equity income fund?

You have probably seen the recent press coverage about trading being suspended in Neil Woodford’s flagship Woodford Equity Income fund. In this article we explain why this happened and what investors can do. We also give our view of the Woodford Equity Income fund and give a simple alternative to choosing your own investments.

What has happened to Neil Woodford’s fund?

On 3 June, buying and selling shares in the Woodford Equity Income fund was suspended by the fund’s Authorised Corporate Director, Link Fund Solutions. This means that investors cannot deposit new money into the fund, or – perhaps more importantly – withdraw their money from the fund.

The trading suspension initially lasted for 28 days, during which Woodford sold or reduced holdings in a number of companies. However, Link Fund Solutions has extended the suspension and said that it is likely to last until early December, giving the fund manager more time to reposition the portfolio.

Why has trading been suspended in Woodford Equity Income?

Woodford Equity Income has gone through a period of very poor performance recently. A number of companies that Woodford holds have experienced significant declines in their share prices, and the fund has also suffered due to its holding of UK domestically focused companies which are out of favour at the moment.

This extended run of poor performance has led many investors to withdraw their money from the fund – Woodford Equity Income has shrunk from more than £10 billion to £3.7 billion in the last two years. This money has to come from somewhere, and Woodford has been forced to sell his more liquid holdings (those that are easier to sell) to pay investors. These liquid holdings are typically bigger, well-known companies.

As Woodford has been forced to sell more of his holdings in bigger companies, the proportion of the fund that is held in smaller, earlier-stage companies has increased. Many of these companies are unquoted or listed on the Alternative Investment Market (AIM) for smaller companies, and by their nature they are riskier investments and more difficult to sell. This means that the current Woodford Equity Income fund now looks very different to the fund that launched in 2014, and also to the funds that Neil Woodford ran while working at Invesco.

Link Financial Solutions took the decision to suspend trading in the fund to protect investors and to avoid the quick sale of assets at prices that may not represent fair value. The period of suspension is designed to give Neil Woodford an opportunity to reshape the portfolio in an orderly manner, and to move investors’ money into more liquid investments.

What is Bestinvest’s view on Woodford Equity Income?

At Bestinvest we suspended our rating of Woodford Equity Income in December 2017, pending a review of the fund. After several meetings with the fund manager and other senior staff at Woodford Investment Management we took the decision to remove our rating of the fund in March 2018.

At the time we sent an email to our clients explaining that the rating downgrade wasn’t due to performance alone, but rather a number of factors. These include considerable changes to the portfolio, which has seen a notable increase in exposure to both earlier stage growth businesses, including unquoted companies, as well as UK cyclical stocks. The manager has undergone periods of underperformance in the past and recovered, although looking forward and given current portfolio positioning, the fund is unlikely to deliver the defensive characteristics that investors have come to expect in recent years.

Given current portfolio positioning, the fund is unlikely to deliver the defensive characteristics that investors have come to expect in recent years.

In January 2019, 10 months after we removed the fund rating, Woodford Equity Income also appeared in Spot the Dog – our report of consistently underperforming funds.

What about Woodford Income Focus and Woodford Patient Capital Trust?

Woodford Income Focus, the newer fund from Woodford Investment Management remains open to investors. Unlike Woodford Equity Income, it does not hold any unquoted companies. At Bestinvest we have not rated this fund.

Woodford Patient Capital Trust is a publicly listed investment trust, and its shares continue to trade on the London Stock Exchange. At the time of writing the shares were trading at a significant discount to Net Asset Value. The trust is not rated by Bestinvest.

Are you concerned about your investments?

If you are concerned about your investments or would just prefer not to pick and choose them yourself, the easy option is to invest in a Ready-made Portfolio. The portfolios are built and looked after by the investment team at Tilney, our sister company. The team spends their days deciding where and how much to invest, reviewing the portfolios and making any changes when they need to.

Find out more

 

If you have any questions about Woodford Equity Income or our Ready-made Portfolios please call us on 020 7189 2400 or email best@bestinvest.co.uk.

 

Important information

The value of your investment can go down as well as up, and you can get back less than you originally invested. This article does not constitute personal advice.  If you are in doubt as to the suitability of an investment please contact a financial adviser.