It's been a torrid three months for fund manager Neil Woodford since the suspension of his flagship Woodford Equity Income fund on June 3. In the weeks since the fund was forced to suspend trading, the embattled fund manager has faced a deluge of bad news around many of his largest fund holdings. The fund is set to remain suspended until at least December and investors are no longer able to see what companies it invests in.
Burford Short Attack
The highly public spat between litigation specialist Burford Capital (BUR) and US hedge fund Muddy Waters grabbed the headlines in August, usually a quiet month for City news. But the Burford story is also a Woodford story – the Aim-listed firm makes up 6% of the suspended Woodford Equity Income fund, according to Morninstar data (to April 30, 2019). The most recent top 10 holdings data, to June 30 2019, shows that Burford is the second biggest holding for the fund after Barratt Developments (BDEV), which reports final results this week.
Publishing the latest performance data for the fund, manager Link (the authorised corporate director for the fund) said that between June 3 and August 21, Woodford Equity Income lost 11.15% and pinned some of the blame on the Burford crash: “Over the latest 28-day period of suspension the fund has underperformed its benchmark, which can be primarily attributed to the price decline of two of its larger holdings, Burford Capital and Industrial Heat.”
Industrial Heat, which is owned by Woodford Patient Capital Trust, is not listed on the stock market but has recently been revalued lower.
Burford’s shares plunged 65% on one day after in early August after Muddy Waters published a highly critical report into the company. The fall also hit Woodford’s former employer, Invesco, which holds just under 14% of Burford, according to Morningstar data.
Stobart Suspends
Eddie Stobart (ESL) is another Woodford holding to have suffered in recent weeks. On August 23, the high-profile trucking firm suspended trading in its shares and ditched its chief executive with immediate after finding a £2 million error in its 2018 accounts. Woodford owns 25% of Eddie Stobart, according to Morningstar data, with Axa IM owning just under 5%.
Next, shares in FTSE 250 loans company Amigo (AMGO) more than halved on Thursday 29 August, as it warned of a slowdown and the impact of the FCA looking into the sector.
Amigo was held by Woodford as part of his mandate for managing St James’s Place funds - though the wealth management firm has now given the mandate to Columbia Threadneedle and RWC.
Stock market filings from after Woodford Equity Income was suspended show that Woodford slashed his holding in Amigo from 10% to 5.5% on June 7. The stake has since fallen below the 5% level at which a manager needs to notify the FCA of any trades. At the end of June 2019, Woodford owned 16.8 million shares in Amigo, which is around 3.4% of the issued share capital.
The poor performance of many of these listed holdings have caused the equity income fund to breach the FCA's limit on the proportion of the portfolio that can be invested in unquoted and illiquid assets.
We have written before of the connection between Neil Woodford and Invesco’s Mark Barnett, who inherited many holdings from his predecessor after Woodford left Invesco to set up his own firm in 2014 and Barnett took over the running of his funds.
Invesco funds hold 14% of Amigo, Morningstar data shows, spread across Invesco UK Strategic Income, Invesco High Income, and the Barnett-run Edinburgh Investment Trust (EDIN), Perpetual Income & Growth (PLI) investment trust. The Edinburgh trust has a Silver rating from Morningstar, while the high income fund has a Bronze rating. Morningstar analyst Peter Brunt says: “A prolonged period of underperformance has placed pressure on the fund's longer-term track record.” The strategic income fund also has a Bronze rating from Morningstar.
Buying Blue Chips
Aside from share price collapses, August saw some disposals from the fund as Woodford endeavours to clear out underperforming investments and illiquid assets.
Last month Woodford sold his stake in US biotech firm Prothena (PRTA), whose shares collapsed 71% on one day in April last year. The firm was part of the equity income fund and the closed-end Woodford Patient Capital at launch and was the biggest holding in the investment trust at one point. The shares rallied over 20% on the news that Woodford has sold out of the firm.
Separately, Woodford Investment Management is expected to sell its 40% stake in start-up finance platform Accelerated Digital Ventures to Legal & General, although the deal has yet to be confirmed.
Where is the money from the disposals being re-invested? While the latest holding data for the fund isn't available, the interim results for Woodford Equity Income show that the fund added FTSE 100 names BT (BT.A), British American Tobacco (BATS) and International Consolidated Airlines (IAG) in the first half of 2019, all names that have been out of favour with investors this year. Those investors with longer memories will note that BATS was one of the fund’s original holdings at launch in 2014 and a core holding in Woodford's Invesco funds.
Woodford Investment Management said last week: “We continue to reposition the portfolio in readiness for its reopening later in the year. When the Fund does reopen, investors will see a much more liquid portfolio. It will continue to be focused on undervalued companies, but the majority of them will be FTSE 100 and FTSE 250 index constituents.”
Woodford blamed unfavourable market conditions for the underperformance of the fund, suggesting that investors willing to pay high prices for stocks that have performed well, which is known as momentum trading. The fund group defended its “disciplined, valuation-oriented investment approach”.
Some market experts have argued that Woodford’s holdings have represented “easy pickings” for short-sellers. But Woodford IM has denied that the manager is a forced seller: “Neil has the time and space to deliver on his strategy to place the unquoted parts of the portfolio with interested buyers.”
But Jupiter’s James Clunie, discussing the Burford case, argues that part of the success of the “bear raid” can be attributed to there being a forced seller in the market, in this case Neil Woodford, with traders following each other in pushing the shares down. The move to stop investors seeing the fund’s holdings, announced on August 21, could be seen as an attempt to thwart the short-sellers.
