A year on from the debacle there are key lessons that can be learnt and big questions that remain.
This week marks a year since 3 June 2019, when shockwaves were sent through the fund management industry as Britain’s most prominent fund manager barred investors from accessing their cash.
But, a year on from the suspension and almost eight months after it was announced the fund would be wound up, investor money has still not been returned in full. There remains around £500 million in assets in what is now known as LF Equity Income (formerly LF Woodford Equity Income).
A year ago the fund suspension of LF Woodford Equity Income was described as a temporary move in order to give fund manager Neil Woodford “time and space” to raise cash to meet investor redemptions, which had risen to high levels following a period of poor performance.
Ordinarily, equity fund managers would sell down their holdings, but the issue that exacerbated the problem for Woodford was a large weighting to illiquid investments in the form of unquoted shares, which are not easy to trade quickly.
In the months that followed, Woodford attempted to move the fund away from these illiquid holdings; but two months prior to its scheduled re-opening in December, the fund administrator (Link Funds Solutions) stepped in and fired Woodford.
As a result, the fund was wound up and investor money (with a haircut of around 30% to 40%) was set to be returned to investors.
Link Funds Solutions appointed BlackRock and Park Hill to help sell the remainder of the assets, with the proceeds given to investors in the fund over a series of payouts.
How much money has been returned to investors?
The first payment to investors made at the end of January was equivalent to around three-quarters of the fund’s assets - £2.1 billion.
Investors were and will continue to be paid an amount based on the number of units or shares they have. In the first payment investors received between 46p and 58p per unit, depending on the share class. These figures were significantly below both the initial unit price of the fund at launch (100p) and the current unit price (around 76p per share, depending on the share class).
In March another payment was made, with investors receiving 3.1p to 3.9p per share, depending on the share class. This second sell-off raised £143 million.
But since then no further announcements have been made, and as it stands around £500 million of assets remain in the fund.
Ryan Hughes, head of active portfolios at AJ Bell, notes: “We’re now one year on from the disastrous Woodford collapse and frustrated investors are still waiting for their money back. There are still £500 million of equity income fund assets stuck in illiquid companies and little indication of when they are likely to be sold.
“Given the current state of the global economy due to the impact of Covid-19, there is little immediate prospect of progress being made in selling these assets and a big question mark hangs around their valuations during current market conditions.”
Key lessons from the Woodford debacle
A year on from the debacle there are key lessons that can be learnt and big questions that remain, with one of those concerning whether the open-ended fund structure is suitable for illiquid investments.
On this issue, both the Bank of England and Financial Conduct Authority have raised concerns. One solution proposed is longer redemption periods for funds investing in illiquid assets, with redemptions on a weekly or monthly basis as opposed to the current daily dealing structure.
But to date no rules have been set out by regulators for such funds to follow.
Hughes says: “The risk of a liquidity mismatch remains a real threat to investors so long as potentially highly illiquid and unquoted assets are allowed to be held in daily traded open-ended funds. A number of fund managers have attempted to address this, but unquoted companies are still held in funds and there has been little word from the FCA about an outright ban.
“Instead the regulator has reminded asset managers of their responsibilities and reiterated that suspensions are an appropriate tool. But telling investors they can’t have their money back when they want it and that it is for their own protection is ultimately damaging for investor confidence in the long term.”
Adrian Lowcock, head of personal investing at Willis Owen, points out that “liquidity was at the centre of the downfall of Woodford”; its suspension, and three separate periods of suspensions for commercial property funds (global financial crisis, Brexit vote and coronavirus), highlight the fact that the open-ended fund structure is “often not the best option for illiquid investments”.
He adds: “The rules for most open-ended funds allow them to hold up to 10% in unlisted investments. This does not sound like a lot, but when you have money flowing out of the fund quickly and it takes time to sell your illiquid investments you can rapidly get on the wrong side of the rules.
“Investment trusts don’t have this problem as the buying and selling of shares does not affect the amount of money held in the trust. Large sales of the investment trust’s shares do not result in the manager having to sell any of the underlying assets.”
Lowcock highlights other key lessons that can be learnt from the Woodford episode: don’t assume past performance will be repeated, know what your fund manager is doing, and watch out for style drift.
On the final point, Lowcock adds: “Fund managers tend to find a niche - an approach and strategy that they feel comfortable operating in. As a result, the day-to-day strategy doesn’t change, and fund management becomes quite a repetitive job requiring discipline. Of course, all good fund managers can and should fine-tune their approach as they learn from their mistakes and markets evolve.
“However, if a manager drifts too far away from their approach this should be a cause of concern and raise a few questions. Does the manager have the skills to invest in the new style? Does the fund still have a place in your portfolio? If you are unsure whether they [do have those skills], then the best option is to find another fund you are more comfortable with.”
Dzmitry Lipski, head of investment research, at interactive investor, makes a similar point.
“Woodford Equity Income is an extreme reminder that star fund managers can have a shelf life – especially if they don’t stick to their knitting. If a fund manager has been doing something well for years, it is worth raising an eyebrow if you see a big change in style. And that was the first big warning sign with Woodford, who moved away from what he knew into unquoted stocks.
“The warnings were there: even back in 2016, the unquoted holdings and biotech exposure in Woodford Equity Income gave it a strong correlation with what was then known as Woodford Patient Capital, the investment trust. But it was the wrong structure, being open-ended, for those types of investments – and we all know what happened next.”