It’s been over a week since investors in Neil Woodford’s Equity Income fund have been able to take their money out. Why did the fund stop withdrawals and what happens next?
Why did the fund stop investors taking their money out?
Neil Woodford, who manages the fund, effectively froze it on June 3rd after a number of investors had withdrawn their money. The amount of money that was leaving the fund was so large that Neil Woodford said he had to act to ‘protect investors’. In particular, Kent County Council, which has £263 million of pension money invested, planned to withdraw the lot on June 3rd. The suspension meant it was unable to do that.
SAVVY TIP: £263 million sounds like a lot of money (it is!), but it’s only four per cent of the money Kent County Council’s pension fund has invested.
A withdrawal of this size could have been very damaging to the fund’s strategy, coming at a time when it was trying to reduce its investment in so-called ‘unquoted stocks’ and increase its investment in shares that were traded on the stock exchange. Neil Woodford has issued a video update explaining why he suspended withdrawals in his fund.
There are a number of issues that came to a head with the suspension of withdrawals. One problem was that Neil Woodford had invested a portion of the fund in unquoted shares, which meant he couldn’t sell them. So, instead, he had to sell the shares in bigger companies (ones that were quoted on the stock exchange) when investors wanted their money back. The more of these shares he sold, the higher ratio of unquoted: quoted shares in his fund. The regulator, the Financial Conduct Authority, places limits on how much an investment fund can invest in unquoted shares, to make sure that these funds aren’t too risky.
How long can the suspension last for?
This suspension can last for up to 28 days before it has to be reviewed. Neil Woodford could let investors take their money out well before then, but some experts believe that the suspension could last for weeks rather than days.
Who invested in the Woodford Equity Income fund?
Neil Woodford’s Equity Income fund had become very popular with individual investors as well as so-called institutional investors (such as pension funds). It’s partly because he had such a good reputation as a fund manager, especially at his previous company, Invesco Perpetual, where he ran their high income and income funds.
Woodford’s Equity Income fund was listed as a ‘select fund’ by a number of platforms and brokers, including the biggest, Hargreaves Lansdown. This meant that investors who weren’t sure what to invest in, were more likely to invest in one of these funds.
Last week, after the suspension of withdrawals, Hargreaves Lansdown removed the fund from its Wealth 50 list, and wealth managers St James’ Place said they would no longer use Neil Woodford to manage £3.5 billion of their clients’ money. Some other investment firms had already removed Woodford’s Equity Income fund from their fund lists.
Woodford Equity Income fund and unquoted stocks
The Woodford Equity Income fund had invested a sizeable amount of the fund in unquoted stocks. These are shares in companies that aren’t listed on the main stock exchanges. Investing in unquoted stocks is riskier than investing in larger companies whose shares are traded on a stock exchange. It also causes problems if you want to cash in your investment, because these stocks aren’t traded in the same way that shares in large, established companies are.
What happens next?
The financial regulator, the FCA and Nicky Morgan, chair of the Treasury Select Committee, have called on Neil Woodford to waive his investment fees on this fund. So far he’s not said he’s going to do this. His view is that the fees are charged for managing the fund and that’s something he’s continuing to do. I’m not sure it will go down well with investors, though.
If you’re an investor in his fund, you have no choice but to sit tight while the fund is frozen. You can download a letter that Neil Woodford sent out to financial advisers, for them to send onto their clients here: 2019_06_11_NW_letter_to_investors
Can any fund suspend withdrawals?
Funds can freeze or suspend withdrawals if they absolutely need to do this to protect investors, and it does happen from time to time. However, it’s not something that happens regularly, so, not surprisingly, many investors didn’t realise that a fund could be frozen and that they wouldn’t be able to get at their money.
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