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Woodford Equity Income fund suspension – unwelcome but inevitable

4 June 2019

Darius McDermott, managing director of Chelsea Financial Services, comments on the suspension of trading in LF Woodford Equity Income fund.

It is not a good sign, nor a good thing for the industry, that a flagship UK equity income fund has has to suspend trading.

Unfortunately, it will have become impossible for Neil to run the fund, given the pace of redemptions he has had to deal with. It is our understanding that the ACD took the decision to suspend trading on the back of the recent increase in redemptions. This is in line with the FCA’s encouragement of ACD’s to act on potential negative outcomes for investors.

While it will be worrying for investors and frustrating for those that would like to access their money, it has been done for their benefit.

Neil Woodford is probably the most well-known fund manager in the UK and, over more than three decades, he has produced good returns and has a loyal following. However, over the past couple of years, the performance of Woodford Equity Income fund in particular has been disappointing. Over the past 12 months, the value of the fund has fallen about 18%*.

This underperformance has been due to a number of factors. Firstly, Neil’s style has been out of favour. He holds many unloved and undervalued UK companies, which are domestically-facing. But as Brexit drags on and on, they are not being given the opportunity to recover.

There have also been a number of stock-specific issues. The knock-on effect is that the fund has suffered large redemptions, as many investors have taken their money elsewhere. This, in turn, has meant Neil has been a ‘forced’ seller of some of his stocks, even if they have have done well, in order to meet those redemptions. It’s a vicious circle.

We will have to wait and see what action is taken next. But I would urge investors not to panic. As I said, the suspension of trading is in the interest of shareholders, so Neil is not forced to sell holdings quickly, at a lower price.

*Source: FE Analytics, total returns in sterling, one year to 31 May 2019

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