Neil Woodford’s fund could remain frozen until December

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It’s two months since investors in Neil Woodford’s Equity Income fund have been able to take their money out. And today (July 29th) the fund announced it’s likely to stay closed until December. 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Neil Woodford, who manages the fund, effectively froze it on June 3rd after a number of investors had withdrawn their money.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. At the time, Neil Woodford 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 will the suspension last for?

On July 29th, the Woodford Equity Income Fund announced that it would be likely to stay closed until early December. I must confess that I was pretty surprised that the freezing/suspension would last so long. Link Asset Services, which is authorised corporate director of the fund, wrote to investors to explain why the fund would be closed for this long. Under the rules, they have to provide an update, and write to investors, every 28 days. You can read the letter that Link Asset Services sent to investors, here.

The lengthy suspension has – understandably – infuriated some of the fund’s investors. Stock market investments are designed to be long term. But that doesn’t mean you want to have your money trapped in a particular fund, especially after the revelations about unquoted stocks, and the rocky ride the fund has had over the last several months.

What’s happening about the charges?

Charges are still being levied on the Woodford Equity Income fund.  The financial regulator, the FCA and Nicky Morgan, chair of the Treasury Select Committee, have called on Neil Woodford to waive his management 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. But it’s going down very badly – understandably enough – with investors.

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?

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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