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Woodford fund suspension extended – What does this mean for investors?

01 August 2019

5 minute read

Neil Woodford’s Equity Income fund is likely to remain suspended until early December. 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 extended LF Woodford Equity Income fund suspension means for you.
  • Why you are unable to trade at present.
  • What lessons investors may learn from this.

The suspension of high-profile fund manager Neil Woodford’s flagship LF Woodford Equity Income Fund is now expected to last until early December.

The fund was originally suspended on 3 June for 28 days after a growing number of investors withdrew their money, and on 1 July investors learned that the suspension will continue for another four weeks.1 In its latest update on the suspension, published on 29 July, the fund’s authorised corporate director Link Fund Solutions said that the suspension “is likely to last until early December” while the fund’s portfolio is re-positioned.

A period of poor performance saw a rising number of investors cashing in their holding before the original suspension, with the value of the fund falling from around £10bn in size two years ago to just £3.7bn today.2

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

What does the ongoing suspension mean for investors?

While the suspension remains in place investors won’t be able to buy or sell shares in the fund.

This means that, for example, if you want to get your money out of the fund for any reason, you won’t be able to do so at present.

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 still suspended?

The suspension remains in place because this approach represents “the best outcome in terms of value, time and fair treatment for all investors,” according to a statement from Link Fund Solutions, in conjunction with Woodford Investment Management.3

Preventing investors from buying or selling holdings in the fund should give Mr Woodford time to reposition the portfolio of companies held within the fund so that requests by investors for their money back can be met. This involves selling unlisted and illiquid stocks that are hard to sell and buying more liquid investments that can be bought and sold more easily to meet these requests.

Shares in unlisted or illiquid stocks are, for example, those that are not listed on a public stock exchange, and they can take time to sell, unlike those listed on the FTSE 100 Index of Britain’s biggest companies, which are easy to sell quickly.

What went wrong?

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.4

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. Liquidity refers to the speed at which an asset can be bought or sold in the market, without affecting its price.

How long will the suspension last?

In short no one knows. Although the latest statement from Link Fund Solutions says the suspension is likely to last until early December, it could be longer.  The next update from the fund is required at the end of August.

It’s up to Link Fund Solutions Limited (LFS), in agreement with the funds’ depositary, to decide when the dealing of shares may start again. They may decide to lift the suspension before early December, but if they feel they need more time to reposition the fund, it may be extended further. A review of the fund must be conducted at least every 28 days.

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

What about other Woodford products?

The Woodford Income Focus fund and the Woodford Patient Capital Trust are still able to trade as normal.

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 suspension of the fund is a reminder that when you invest you may not be able to get your money back when you want to, 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.

Find out how we select our Funds List

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The value of investments can fall as well as rise. You may not get back what you invest. We don’t offer personal financial advice so if you’re not sure about investing, seek independent advice. Tax rules can change and their effects vary depending on your individual circumstances.

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