Woodford Equity Income fund to be wound up – What does this mean for investors?

17 October 2019

5 minute read

Neil Woodford’s Equity Income fund is to be wound up. Here, we explain what this means for investors.

Who's it for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • What the winding up of the LF Woodford Equity Income fund means for you.
  • When it will happen.
  • What lessons investors may learn from this.

High-profile fund manager Neil Woodford’s flagship LF Woodford Equity Income Fund is to be wound up.

Woodford Investment Management have announced that the firm will close and dealing in the Woodford Income Focus fund has been suspended. No announcement has yet been made on the Woodford Patient Capital Trust.

The Equity Income fund was originally suspended for 28 days in June after a growing number of investors withdrew their money.1 The suspension was then extended and had been expected to end in December. However, the fund’s authorised corporate director Link Fund Solutions has decided not to re-open the fund and instead to wind it up, having concluded that this is “in the best interests of all investors.”2

Neil Woodford is no longer managing the fund and Link Fund Solutions has appointed two companies to manage the investments as the fund winds up.

Here, we consider what you need to know if you’re an investor in the Woodford Equity Income fund.

What does the winding up of the fund mean for investors?

If you want to get your money out of the fund for any reason, you won’t be able to do so at present, as you can’t sell shares in the fund.

When the winding up process begins in January next year, Link Fund Solutions will start paying money back to investors once the fund’s assets have been sold.

Transferring your holdings is possible with certain restrictions, so if you want to move your holding from one investment platform to another this may be possible.

Why is the fund being wound up?

The fund was originally suspended to give time to reposition the portfolio of companies held within the fund so that requests by investors for their money back could be met. This involved selling unlisted and illiquid shares and buying more liquid investments that can be bought and sold more easily to meet these requests.

However, according to Link Fund Solutions, whilst progress has been made in relation to repositioning this fund’s assets, unfortunately this has “not been sufficient” to keep the fund on track to re-open in December.

A statement from Link Fund Solutions said: “Despite the progress made, it is uncertain when this repositioning would be fully achieved and Link Fund Solutions has therefore concluded that it is in the best interests of investors for the fund to be wound up on the basis of an ‘orderly realisation’ of the Fund’s assets.

“This will allow the return of money through interim payments to investors more quickly than if the Fund had remained suspended for a longer period of time.”2

What happens next?

Link Fund Solutions must now request formal permission from the regulator, the Financial Conduct Authority (FCA), to wind up the fund. It is expected that the process of winding up the fund will begin in January 2020.

It cannot happen earlier than this as three months’ notice must be given to investors. The fund’s assets will be sold “over a reasonable period of time” to avoid a “fire sale” which would potentially significantly reduce the value of the assets.

Once enough cash is realised from sales of the fund’s assets, cash will be returned to shareholders in proportion to the size of their investment in the fund. This will continue until all the fund’s assets have been sold.

When will investors get some of their money back?

The first distribution is expected to be paid to investors by the end of January 2020. Further details will be announced nearer the time.

We’ll let Smart Investor customers in the Woodford Equity Income fund know of any further significant changes or announcements that affect the fund in the meantime.

What went wrong with the Woodford Equity Income fund?

Mr Woodford is known for following a so-called ‘contrarian’ approach to investing, picking unloved shares in the belief that he is buying cheap and that these investments will produce returns when they come into favour. His particular investment style has focused on small, mid-cap and unquoted companies that he believed had the potential for profit.

Some of the companies Mr Woodford picked have fallen substantially in value over recent years, such as online estate agent Purplebricks and doorstep lender Provident Financial, contributing to the fund’s poor performance.3

As investors have pulled money out of the fund, the proportion held in unlisted companies increased, leaving Mr Woodford having to sell the more liquid investments in order to release investors’ cash.

Essentially, however, investors have withdrawn money quicker than he has been able to manage liquidity, which led to the fund being suspended and now wound up. Liquidity refers to the speed at which an asset can be bought or sold in the market, without affecting it’s price.

What are the lessons for investors?

There are a few lessons that investors may learn from what is happening with the LF Woodford Equity Income Fund.

While a fund may be invested in a variety of companies, there are no guarantees of positive returns. No matter how strong a fund manager’s winning streak, they can go through periods of underperformance and things can go wrong.

The winding up of the fund is a reminder that when you invest you may not be able to get your money back when you want to, and that you may get back less than you put in, so it’s vital to always keep a cash buffer in place which is readily accessible.

It’s also important to ensure your investment portfolio is properly diversified across a wide range of asset types and sectors, so that if one investment performs badly, another might make up for any losses. This means you may want to pick, say, five or six funds to help spread risk, with a variety of managers choosing the underlying investments.

There are plenty of other assets such as shares and bonds on offer that may form part of an investment portfolio.

Remember that wherever you choose to invest, any investment may fall in value as well as rise, and you could get back less than you initially invested.

Was the LF Woodford Equity Income fund on the Barclays Funds List?

No, the LF Woodford Equity Income fund never featured on the Barclays Funds List.

Our Funds List is a selection of funds, hand-picked by our investment experts. The funds aren’t personal recommendations but aim to help you make an investment decision by narrowing down the options.

We believe that selecting the funds is both a science and an art and our team of investment analysts have developed a process that encompasses both.

They seek to identify funds they believe have a strong chance of producing good investment returns over the medium to long term – although that obviously can’t be guaranteed as there’s always a risk with investing that you could lose money. There may also be other funds, not on the list, that perform as well or better.

We believe our approach is both objective and robust. Our article explains how it works and how we apply it.

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