A week on from the shock announcement that Woodford Equity Income would suspend trading, Woodford Investment Management said on Monday it will only publish the top 10 list of holdings in the open-ended fund while it is suspended. This reverses the previous policy of publishing a complete list of holdings and is in "the best interests of investors", the company said.
The decision will affect all three of the firm's funds, including Woodford Income Focus and Woodford Patient Capital trust, which have not been suspended from trading.
Woodford has previously been hailed as a pioneer for transparency in the industry. It was the only investment house to reveal its full list of holdings every month. But commentators say that the high level of transparency may have exacerbated the problems of the Woodford Equity Income fund in recent months as short-sellers have been able to see his investments and bet against them.
Downgraded
Morningstar analysts on Thursday downgraded the Woodford Equity Income fund to a Negative Rating. The change comes just days after analysts downgraded the fund to Neutral and follows Woodford's decision to suspend trading in the fund after a flood of investor redemptions.
It comes after wealth giant St James's Place announced on Wednesday it had terminated its mandate with Woodford Investment Management. Woodford had previously run the firm's UK High Income Unit Trust, Income Distribution, and SJPI UK High Income funds, with assets totalling £3.5 billion.
Instead, the mandate will be handed to Richard Colwell of Columbia Threadneedle and Nick Purves of RWC to manage jointly. Purves already runs SJP's Equity Income fund while Colwell has worked with the firm for several years.
Morningstar analyst Peter Brunt said: "With portfolio positioning now focused more on sourcing liquidity than on investment conviction, we consider the strategy to be structurally impaired in its ability to implement its investment process."
The decision followed the announcement last week that Neil Woodford had suspended trading in the Woodford Equity Income fund.
Investors are not able to buy, sell or transfer shares. In a statement on its website on Monday, Woodford Investment Management said it had suspended dealing “with immediate effect and until further notice”.
It said: “After consideration of all relevant circumstances to the Fund’s assets we have…come to the conclusion it is in the best interests of all investors in the Fund to suspend the issue, cancellation, sale, redemption and transfer of shares in the Fund.”
The firm said the move had been made to protect remaining investors, following an increased level of redemptions. It will also give Woodford the time to reposition the portfolio away from unquoted and less liquid stocks into more liquid investments, it added.
Woodford took the unusual step of making a personal statement on YouTube on Tuesday to explain why the decision had been made and apologised to investors.
"This decision was motivated by your interests," he said.
Hargreaves Lansdown
Last week, fund supermarket Hargreaves Lansdown, a long-time cheerleader of Woodford, made the decision to remove the Woodford Equity Income and Woodford Income Focus funds from its coveted Wealth 50 list of favourite funds.
The fund supermarket sparked controversy earlier this year when it kept Woodford's flagship fund on the best buy list over better-performing rivals despite its sub par returns. Hargreaves Lansdown is one of the biggest investors in Woodford Equity Income, with £621 million invested in the fund through its six multi-manager portfolios. The HL Multi-Manager Income & Growth fund has 14% of its portfolio in the fund.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "We are advocates of long-term investing and think Woodford's multi-decade track record remains compelling, but we don't underestimate the disappointment investors must feel with recent performance.
"The suspension is understandably frustrating, but it's important to remember that the value of your investment will be dependent on the share price of the portfolio's underlying holdings, which are not directly impacted by the suspension."
Last month, Morningstar analysts downgraded the rating on the fund from Bronze to Neutral. It came only a year after the fund was downgraded from a Silver analyst rating.
Morningstar analyst Peter Brunt said: "The suspension underlines our concern over the illiquid nature of the portfolio, which was among the key drivers behind the fund's downgrade to Neutral. While the move protects existing investors, it also gives them no choice but to sit through this portfolio." He added that the situation was likely to take weeks rather than days to become fully resolved.
Wave of Redemptions
Woodford Equity Income has endured a wave of redemptions as investors have grown increasingly frustrated with poor performance. Woodford Equity Income was among the worst performers of all funds in May, down 9.1% in the month. The Woodford Income Focus fund was down 8.3%. There have also been concerns about the proportion of the fund invested in illiquid assets and early-stage biotech companies.
Worried investors have also piled out of Woodford Patient Capital (WPCT) investment trust this week, with the share price falling nearly 15% to 66p.
Ryan Hughes, head of active portfolios at AJ Bell, said: “This will come as a shock to many people but it shows the sheer scale of redemptions has been suffering in recent months. With an element of the fund in illiquid investments, it is clear that it was having to sell the more liquid holdings to fund redemptions, which can exacerbate the problem.”
May was the 23rd consecutive month that the Woodford Equity Income fund had suffered net outflows. It is estimated that investors pulled around £10 million a day out of the fund in May. The size of the fund, which peaked at £10.2 billion, has shed £560 million of assets in a matter of weeks. Today it has £3.7 billion of assets.
Ben Yearsley, director at Shore Financial Planning, said: “This just highlights the problem with having illiquid holdings in an open-ended fund, which only gets worse when investors decide to withdraw their money. Arguably, this is a problem that has been coming for some time as performance hasn’t improved and investors have withdrawn money quicker than Woodford has been able to manage liquidity.”
Hughes added: “This is not a decision that will have been taken lightly and it is done to protect the interests of remaining investors. Events such as this are rare but it is a reminder to all of the risks that come with investing in illiquid assets while offering daily liquidity to investors. This never appears to be a problem but when sentiment turns it can come back to bite investors badly.”
