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4 Jun 2019

Neil Woodford's £3.7bn fund suspended: will investors lose out?

Investors are unable to access their money until dealing is resumed

Investors in Neil Woodford's flagship Equity Income Fund have been left in limbo, unable to access their investments for at least four weeks, after trading in the fund was suspended on Monday.

The suspension was announced after the fund manager struggled to keep up with investors' requests to withdraw their money in the light of poor performance, with withdrawals averaging £9 million a day in May.

The final straw was a request from Kent County Council, which on Friday requested to withdraw £250m that had been invested in the Equity Income Fund from its pension scheme.

What's more, news that the share price of outsourcing group Kier fell 40% on Monday may have further fuelled withdrawals, as Woodford Investment Management held 20% of the shares in Kier.

Which? explains what happened at Woodford Investment Management and how investors will be affected.

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What does Woodford say?

Woodford has not responded to questions at the time of writing, but has issued a statement from Link Asset Services on its website, saying: 'After consideration of all relevant circumstances relating to the Fund's assets, we have, in conjunction with Woodford Investment Management, come to the conclusion it is in the best interests of all investors in the Fund to suspend the issue, cancellation, sale, redemption and transfer of shares in the Fund.

'Following an increased level of redemptions, this period of suspension is intended to protect the investors in the fund by allowing Woodford, as previously communicated to investors, time to reposition the element of the fund's portfolio invested in unquoted and less liquid stocks, in to more liquid investments.

'During the period that share dealing is suspended no requests to redeem, purchase or transfer shares in the Funds will be accepted.'

Will investors be able to get their money back?

Eventually, yes. The money in the Equity Income fund hasn't been lost, but 'frozen'. The suspension means the fund isn't forced to sell assets at knock-down prices as investors pull their money out.

Eventually, trading in the fund will resume, and investors will be able to buy and sell units again. However, it's not yet known when this will happen.

When trading eventually resumes, it's possible the fund will have fallen in value and investors may have made losses.

I'm an investor: what should I do?

Unfortunately, in the short term, there's not much you can do as an investor. You won't be able to buy or sell until the fund resumes trading.

At this point, you'll need to think carefully about whether you wish to sell, as you may not get back what you invested, and the value of the fund could well rise in future.

More generally, this news reinforces the need for a well-diversified portfolio. Providing investors' money is spread across multiple funds, problems at any single one shouldn't be too much of a problem.

Investors might also want to consider holding passive investments that track the market, rather than actively managed funds that aim to beat it. It's worth bearing in mind that, when investing in actively managed funds, you'll always face difficult questions on when the right time may be to sell a poorly performing fund.

Why has this happened?

Despite an enviable long-term record, the Equity Income Fund has struggled in recent years, and money has poured out of the fund due to poor performance. In May 2017, the fund held a record-high £10.7bn, though that is closer to £3.7bn today.

The fund has been struggling for some time to access cash for investors who want to their money back.

To meet these calls, the fund has been forced to sell its most liquid holdings, meaning the shares that are easiest to buy and sell. As a result, the fund has an increasing proportion of unlisted shares, that are tricky to offload for a decent price.

The fund has also taken the unusual step of using an overdraft, possibly to meet redemptions from investors. At the end of December, the fund was overdrawn to the tune of £50m.

As such, the fund has been frozen to avoid having to sell these shares at knock-down prices, which would disproportionately favour people leaving the fund, at the expense of long-term investors.

Is this a sign of trouble for the wider world of investments?

Probably not. The falling confidence in the Equity Income Fund reflects poor fund performance, rather than wider economic issues.

Neil Woodford has had a run of bad luck recently, as a major investor in Provident Financial, the AA, Utilitywise, Purplebricks, Non-Standard Financial and others, all of which have performed poorly in recent years.

However, the fact that the popular fund has been suspended may prompt the regulator to review how funds manage their liquidity (how easily money can be invested or withdrawn) in future.

A spokesperson for the Financial Conduct Authority said: 'The decision to suspend was made by the fund's Authorised Corporate Director, in conjunction with the Depositary and is to allow an important orderly process of asset sales to happen. The FCA is aware of this situation and in contact with the firms involved to ensure that actions undertaken are in the best interests of all the fund's investors.'

Will investors be covered for investment losses?

No. The Financial Services Compensation Scheme offers limited protection for investors if a company goes bust, but will not pay out because investments have performed poorly.

Are Woodford's other funds affected?

Yes, but not as severely. The Woodford Income Focus Fund fell 2.54% today. Woodford Investment Management did not respond to queries about whether this fund may also be suspended in future.

Woodford's Patient Capital Trust (WPCT), share price closed the day at 70p, briefly touching its lowest ever value during the day. Unlike the Equity Income and Income Focus funds, WPCT is a closed-ended investment trust, meaning there is no risk of investors getting trapped in the fund.

However, investors who want to leave the trust in the short term will be forced to accept a knock-down price, as shares are trading at a 26% discount to their underlying value.

What do other companies with Woodford investments say?

Neil Woodford also manages £3.5 billion on behalf of St James's Place (SJP), who did not respond to Which?'s request for comment in relation to yesterday's suspension.

However, last week Chris Ralph, SJP's investment director said, 'We remain confident in Neil Woodford and his ability to manage our client's money as mandated,' when asked if SJP was likely to ditch Woodford as a result of poor performance.

Investors in Hargreaves Lansdown's Multi-manager funds will also be affected by the suspension. Six of HL's ten multi-manager funds have collectively invested over £600 million in the Equity Income Fund, and a seventh Multi-Manager fund is invested in the Income Focus Fund. Hargreaves Lansdown has removed both funds from its Wealth 50 shortlist of recommended funds.

Update: on 5 June, St James's Place announced it was relieving Neil Woodford of his duties, and the management of the fund would transfer to Colombia Threadneedle and RWC Partners, according to Citywire.

Emma Wall, head of investment analysis at Hargreaves Lansdown said: 'The suspension follows a period of underperformance and outflows for the Woodford Equity Income Fund. We are advocates of long-term investing and think Woodford's multi-decade track record remains compelling - but we don't underestimate the disappointment investors must feel with Woodford's recent performance.

'The suspension is understandably frustrating, but it's important to remember that the value of your investment will be dependent on the share prices of the portfolio's underlying holdings, which are not directly impacted by the suspension.