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Woodford fund suspension – What does this mean for investors?

10 June 2019

3 minute read

Neil Woodford has suspended trading in his Equity Income fund. 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 LF Woodford Equity Income fund suspension means for you.
  • Why you are unable to trade at present.
  • What lessons investors may learn from this.

Britain’s renowned fund manager Neil Woodford has suspended trading in his flagship LF Woodford Equity Income Fund after a growing number of investors withdrew their money.1

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

The news has come as a shock to investors, five years after the launch of the fund in June 2014.

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

What does this mean for investors?

While the suspension is in place, no requests to buy, sell or transfer shares in the fund will be accepted by the fund’s administrator. This means that, for example, if you want to withdraw money for any reason, it is not possible to do so at present.

Why is the fund suspended?

Link Fund Solutions Limited, in conjunction with Woodford Investment Management Limited, said in a statement that it had “come to the conclusion it is in the best interests of all investors in the LF Woodford Equity Income fund to suspend the issue, cancellation, sale, redemption and transfer of shares in the fund”.3

The suspension, it said, is to “protect the investors in the fund” by giving 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 and buying more liquid investments that could be sold to meet these requests.3

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 typically more popular.

What has gone wrong?

As a fund manager, Neil Woodford assesses the potential for returns from various companies when deciding where to invest.

Mr Woodford is known for following a so-called ‘contrarian’ approach to investing, picking unloved stocks in the belief that he is buying cheap and 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.

However, as investors have been pulling 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.

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

Due to rising numbers of investors looking to withdraw their money, the fund has been suspended to allow Mr Woodford time to reposition the elements of the fund’s portfolio invested in unquoted and less liquid stocks into more liquid investments.

How long with the suspension last?

The freeze on withdrawals may be suspended for up to 28 days, after which the suspension must be reviewed, raised or replaced.5

Woodford Investment Management’s Authorised Corporate Director, Link Fund Solutions Limited (LFS) made the decision to suspend the fund with the agreement of the funds’ depositary, and will decide when the dealing of shares may start again.

We will let Smart Investor customers in the Woodford Equity Income fund know of any significant changes or announcements made that affect the fund.

What about other Woodford funds?

Investors may hold the Woodford Income Focus fund, and as yet it is unknown what the impact of the suspension of the Equity Income fund will be on this.

The value of shares in the Woodford Patient Capital Trust fell on the news of the suspension. However, investors are still able to trade in this trust 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.

Yet 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. There are never any guarantees of a positive return.

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