The fallout from Neil Woodford’s fall from grace

Woodford: who has been caught up in the fallout?
If you own a Woodford fund, what should you do now? And what of the other stocks affected by the former “star” manager’s current woes? Merryn Somerset Webb has the answers.
Last week Neil Woodford, one of the UK’s only “star” fund managers, was forced to suspend dealing in his flagship Woodford Equity Income Fund. Having once had assets of nearly £10bn, bad performance and concerns over the portfolio’s structure led to mass withdrawals. This in turn led to liquidity problems: Woodford was unable to sell stocks fast enough at reasonable valuations to pay out to those cashing in without breaching regulations that limit the illiquid holdings in the Woodford Equity Income portfolio to 10%. Its suspension (or “gating”) was the result. Since then nothing has gone right for Woodford. St. James’s Place has ended its £3.5bn relationship with Woodford. Hargreaves Lansdown has taken the fund off its Wealth 50 list and publicly called for Woodford to cut the fees on the £3.7bn he has locked up. There has been wall-to-wall media coverage (relentlessly negative) and, worse, regulator, the Financial Conduct Authority (FCA) is talking about investigating. So what next? Below we try to answer some of the big questions on Woodford’s spectacular fall from grace.

Is it possible that this is just a performance blip?
Whenever anyone talks about Woodford, they refer to his amazing record. But there might be less to this than meets the eye. His record at Invesco Perpetual was “outstanding”, says Brian Dennehy of FundExpert. But that depends on how you measure it. Over the ten years to 2014 (when he set up alone), Woodford’s Invesco Perpetual Income fund was a top performer compared with peer funds. But over the five years to 2014, it was placed only 33rd. Expand the comparison to all UK equity funds and it looks worse. In the ten years to 2014 it was 17th, and over five, 123rd.
Look, then, to his performance since Invesco Perpetual. Woodford Equity Income did fine in its first two years – up 17% against a sector average of more like 2.5%. The longer-term record is not so good. From mid-June 2014 to the end of May this year it was up 1.16%. This lagged the UK Equity Income sector average by 25%. Note that while the liquidity problems in Woodford Equity Income can be blamed on the unquoted stocks held, the bad performance cannot. FundExpert points, for example, to the St. James’s Place UK High Income fund, which Woodford was running for St James’s Place. In May it performed even worse than Woodford Equity Income.
The key lesson here is probably this: Woodford’s success at Invesco Perpetual was largely based on a brilliant, but very big long-term, bet – one that few others had the stamina to maintain – “a consistently large overweight in defensives, in particular utilities, tobacco, and pharmaceuticals”. When that stopped working – and his style began to drift – so did his performance. It could be a blip – he has had them before. But it could be that his old style doesn’t work any more and his new one doesn’t either.
When can I sell?
Probably not for a good few months. The liquidity problem has been an issue for a few years, so Woodford will know where all the potential buyers are, but it will still take a while to get rid of all his illiquid stocks so he can pay out investors who want to leave. When the fund does reopen, investors should prepare for the value of their holdings to be lower than when it was “gated”. There will be forced selling and there will be high levels of dealing costs, too. There is also still a chance that rather than restructure the fund Woodford, encouraged by the FCA, will decide to liquidate it completely and return the cash to investors.

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