Woodford: a lesson in liquidity

Ed Monk

Ed Monk - Fidelity Personal Investing

In 2015, a year after Neil Woodford established his own company to house the funds he ran, the BBC ran an article profiling him with the headline: ‘The man who can’t stop making money’.

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The aura around Woodford back then was dazzling; he had attracted billions to the funds he ran for Invesco Perpetual thanks to their stellar outperformance, and the army of small investors who followed him to his new company were rewarded in that first year with an 18% return, according to the Beeb.

Looking back today, it all seems a very long time ago. Performance in his funds has lagged the market in the period since, assets have dwindled and, most recently, Woodford has been prompted to alter the set-up of his funds in a rethink of how they invest. In particular, Woodford has reformed how he holds investments in unquoted companies - those which are not listed on major markets - with the flagship Woodford Equity Income Fund.

Woodford has been consistently vocal on his faith in unquoted stocks and the opportunity they can potentially provide, particularly companies in the life sciences sector which may prefer private ownership where they can grow without the quarter-to-quarter pressure of the stock market. Indeed, soon after establishing his own company, Woodford launched the Patient Capital investment trust to specialise in these opportunities.

Back in those heady days of 2014 and 2015 investors we’re happy to give him the benefit of the doubt to hold these companies in his flagship fund as well, even if some naysayers quietly questioned why a fund with an income mandate - which usually leads to buying dividend-giant large-cap stocks - was hunting in the unquoted pond where no dividends are paid.

Things were not helped by the ‘equity income’ name. In truth, Woodford’s fund was always aimed at growth as well as income and it had previously fallen out of the Investment Association’s sector for equity income funds because it could not meet the minimum income levels.

But still there was a question about whether a fund was the best place to hold unquoted companies. The launch of Patient Capital was perhaps a tacit admission that the investment trust structure is a better home for them and now this is being reflected with a change of approach in the Woodford Equity Income Fund. The unquoted portion of the fund will be reduced to zero and instead a chunk of shares in the Patient Capital trust will feature in the fund.

The process of making this change has not been pain free. The Fund will buy shares in the trust at their Net Asset Value, not at their actual share price which is some 15% lower, causing some disquiet from fund investors.

One of the prompts for this action was that unquoted companies were beginning to take up too big a proportion of the Equity Income fund, breaking Investment Association limits. Without acting, Woodford may have had to off-load these stakes.

This is where the hidden risks of illiquid assets reveal themselves. ‘Liquidity’ is another way of expressing how easy it is to buy or sell something. Listed shares in big companies are liquid, because there’s almost always a ready audience of buyers if you want to sell. Illiquid assets are harder to sell - it may take time or additional cost and if you need to sell under pressure, these costs can escalate. In Woodford’s case, that pressure was outflows from his fund that meant he needed to raise money by selling assets.

Many of these pressures are easier to handle inside an investment trust, where those wishing to leave can sell their shares and the share price itself can fall. Not a great scenario, but at least you avoid the disruption and cost of having to sell underlying assets.

It has been a painful period for the country’s most famous fund manager, but the changes are aimed at restoring confidence in the Woodford way which proved so successful for all those years.

More on Woodford Equity Income Fund

Five year performance

(%)
As at 10 May

2014-2015

2015-2016

2016-2017

2017-2018

2018-2019

Woodford Equity Income Fund

-

0.7

13.7

-9.2

-13.5

Past performance is not a reliable indicator of future returns

Source: Fidelity, as at 10.5.19, in GBP terms with income reinvested

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The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.