What happened to Woodford Equity Income Fund? That will be the topic of today’s article.
My staff have analysed what happened to the fund and some of the lessons we can learn from this.
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Table of Contents
“In the investment market, the highest consumer expectations are related to the stable performance of investment companies and the best deal conditions. They are followed by the innovativeness of the products offered. Consumers in investment markets are looking for new products that also contain convenient solutions for their use. For example, quick access and remote management of accounts. ”- Liz Wilder, Director of Financial Markets and Services Practice at FleishmanHillard Fishburn (London).
Over the years, inspired by success stories in the investment markets, DIY-investors (investors who decided to independently manage their assets, without the involvement of consultants or asset managers) have actively invested in funds of the so-called “star” managers.
In fact, DIY investors had no idea about actual investment strategies or underlying assets. They assumed that an impeccable track record of fund owners would ensure their success and bring them luck.
And it is quite possible that these expectations would most likely produce the same result as in the case of Neil Woodford.
His company has built trust and an unrivaled and impeccable reputation for itself over two decades. It was believed that there was no better known and reliable way to place your money under management in the whole of Great Britain.
As a result, Woodford himself became part of a select group of “star” wealth managers, and was awarded the Commander of the Order of the British Empire (CBE) for his outstanding contribution to the development of the economy.
During his time at Invesco Perpetual, he managed over £ 15 billion in assets and was known for his non-trivial approach to management strategy.
It was this approach that helped him avoid collapse during the crises of the 1990s (dot-com bubble) and 2007-2008 (financial crisis). In the eyes of many, he simply had no equal, and he was considered untouchable.
This was the reason for the massive transition of investors after him when in 2014 he decided to leave Invesco Perpetual and found his own fund, Woodford Investment Management LLP.
But in 2019, everything changed. After a series of failed stocks and sub-par buybacks, Woodford made an unprecedented decision: to block the ability for investors to withdraw funds from their fund. He needed this step to prevent massive withdrawals of funds and gain time to deal with the accumulated illiquid assets.
The situation not only casts a negative light on one of the largest financial institutions in the UK, but also casts a shadow on the entire market.
Under any circumstances, such a decision would be alarming for the market. But in this case, the situation was aggravated by the fact that Woodford’s fund was widely known and had a reputation as the best player – investing with it was considered not only profitable, but had an unspoken recommendation nature for retail and DIY investors.
The foundation had credibility in the eyes of consumers and the UK industry media. And most likely, many of the DIY investors did not even doubt the ability to buy and sell assets, however they like. And they did not think that the procedure can be difficult and not instantaneous.
Decisive for the British financial regulator was Woodford’s refusal to use the frozen funds, continuing to manage assets and receiving a daily income of about 65 thousand pounds. As a result, Woodford’s subsequent decisions not to use funds became inconclusive for investors.
To make matters even worse, one of Woodford’s largest clients, the Hargreaves Lansdown platform, continued to position the fund as a safe way of investing until the investigation began, which had a negative impact on another 300,000 clients.
The financial regulator is now also investigating the role of this investment platform in all that happened, why, when there was information about unfair behavior in the market, Hargreaves Lansdown continued to promote the fund and offer its services to clients.
The situation not only casts a negative light on one of the largest financial institutions in the UK, but also casts a shadow on the entire market. The manager-broker relationship and the validity of industry guidelines, that is, all the sources that UK investors use to make investment decisions, are in question.
So where does this story end?
After several months of trying to change positions in the portfolio to more liquid ones, it became clear that this would not be enough to reasonably resolve all problems, and in October 2019, the closure was announced.
Woodford was dismissed from his position as fund manager, signaling the end of his stellar trustee career. He also lost his status as a cult investment manager. In addition, such shocks in the future could affect the entire industry, and in particular the category of “star” managers.
In January 2020, the fund’s assets will be sold, and it is estimated that from the moment the fund starts operating, investors will lose 17% of their losses.
More broadly, this means for the market that investors will turn to unconventional assets in search of higher interest rates and higher yields.
On the other hand, many investors also expect instant access to assets and the ability to sell or withdraw them at any time.
This balance between liquidity and long-term returns must be adopted by major investors and actively used by managers and consultants.
Clearly, communications and marketing professionals have a role to play in this. It is important to promote and communicate the importance of long-term investments, as well as the possibilities of smooth withdrawal of funds from the account.
In the wake of the Woodford fund bankruptcy, many saw this as proof that retail investors were better off ditching active strategies and dealing with trustees altogether and moving on to strategies that are considered passive – dealing with exchange-traded funds – Exchange Traded Funds (ETF).
Higher cost is the most important consumer expectation when evaluating companies in the investment industry.
A recent study by FleishmanHIllard’s global network shows that higher value is the most important consumer expectation when evaluating companies in the investment industry, accounting for nearly a quarter of the responses.
This could potentially open the door for new fintech players to offer an alternative and affordable investment strategy or tool for established firms.
And it could very well be a new opportunity to attract investors and outflank the competition through bold marketing, content and communications.
This scenario goes beyond the UK market. And in the future, it remains to be seen whether investment managers and advisors will be able to regain confidence in themselves after recent episodes.
There is no denying the fact that investors around the world will take a closer look at and monitor investment platforms and the managers who manage their assets.
In fact, former all-star stock picker Woodford publicly failed last year after his flagship equity fund was suspended due to a sharp increase in payouts to investors.
Trading at Woodford Equity Income Fund is still in a suspended status. Link Asset Services (the official corporate director of the fund) has confirmed that it will extend the suspension in the best interest of all investors. While trading remains suspended, we will continue to waive platform fees for Woodford Equity Income.
In a statement Monday, July 1, Link Asset Services said that operations with the Fund were suspended after they concluded that redemptions had reached a level where the Fund could no longer continue to meet redemption requests without prejudice to the interests of any investor. According to their words, they believe that by being a “compelled seller” of its assets to redeem, the value received by the Fund for such assets may have been adversely affected and the Fund may not have received full value from such sales.
After considering all the current circumstances surrounding the Fund, Link together with Northern Trust Global Services SE, UK subsidiary, depositary of the Fund, concluded that the continued suspension of the issue, cancellation, sale and repurchase of the Fund’s shares.
Link confirmed that a Woodford Investment Management manager is using this pause time to reallocate the portfolio into more easily tradable stocks, stating that the Fund’s Investment Manager, Woodford Investment Management Limited (‘Woodford’), is taking steps to re-position the Fund’s portfolio to market unquoted and less liquid stocks and invest in more liquid investments.
This has continued since the Fund was suspended and Woodford continues to invest in opportunities to meet the Fund’s investment objectives.
After Link confirmed that they will continue to monitor the fund on a daily basis to assess the current suspension of operations. They have pledged to formally review the suspension at least every 28 days and will keep FCA informed of the review and any changes to the information provided to shareholders.
Woodford investors wait for their money: what will happen?
Investors trapped in the bankrupt Woodford Equity Income fund have been warned that they will have to wait up to a year before they receive their last money back.
Link Fund Solutions, the fund administrator, acknowledged that it may be required until the end of 2021, when the remaining fund shares are sold and the money returned.
In a letter to investors accompanying the fund’s delayed annual report, Link said he could not specify a specific date by which investors would receive their remaining money.
“You are reminded that we have sold most of the fund’s assets and it may take some time to sell the rest,” the message says. “Some of these assets are not expected to be realized until mid to late 2021.”
It will be more than two years since the £ 3.6bn fund was suspended in June 2019, preventing investors from withdrawing their money.
Link’s letter also details the £ 16.7m fees levied on the fund after the administrator fired manager Neil Woodford last October and announced the fund would be liquidated.
BlackRock received most of that amount, with the fund giant paying £ 11 million to sell the fund’s larger publicly traded shares. Private equity specialists PJT Park Hill took £ 3.2 million for their work selling unlisted and difficult-to-trade small companies, while the law firm Debevoise & Plimpton, which also worked on the sales, was paid £ 2.5 million. sterling.
Link’s custodian and Fund Northern Trust waived its fees, and Link also contributed £ 1.2m to the fund to ensure that the fees charged four months after the liquidation was announced do not exceed its previous fees.
So far, £ 2.5 billion has been returned to investors in three payments, with the remaining fund now valued at £ 288 million.
Link details the £ 875m loss since the fund was suspended in its annual report, much of it related to large write-offs of the fund’s large assets in unlisted companies.
At least £ 462 million was wiped off the value of the fund’s unlisted stock as Link applied a “liquidity adjustment” to reflect the price they would likely receive from a sale while others were overvalued below after failing to reach key milestones or raise money at a lower valuation.
The underpriced sale of shares to US investor Acacia Research triggered the bulk of the additional £ 91m written off to the fund.
Link said it expects to make a fourth payment to investors following the close of the deal to sell some of its health fund shares to Acacia.
About £ 92m has yet to be transferred to Acacia, and Link said it is working to complete the deal by November 30th.
This will leave the fund to sell stakes in 17 unlisted companies for around £ 196m.
Now let’s discuss some other questions, understand what was the main purpose of the company, who was its founder, why was Woodford equity suspended, what happened to investors and all types of funds, etc.
Who is Neil Woodford?
Neil Russell Woodford CBE (born March 1960) is a fund manager and founding partner of Woodford Investment Management.
Neil Woodford began his career at the Reed Pension Fund and TSB and later became a fund manager at Eagle Star.
He made a name for himself at Invesco and, at the height of his career, managed funds with over £ 15 billion in investor money. He managed the Invesco Perpetual Income and Invesco Perpetual High Income funds.
Woodford managed funds Invesco Perpetual Income and Invesco Perpetual High Income with assets of £ 10.36 billion and £ 13.64 billion, respectively.
Woodford spoke loudly about the proposed 2012 merger between British defense company BAE Systems and EADS, the European aerospace group, warning that unless there is a “significant change” in BAE’s strategy, Invesco will have to consider “all options.”
Woodford has earned a reputation as the UK’s best fund manager in his 25 years at Invesco, where he escaped the worst of the 1990s dot-com bubble and 2008 financial crisis. He considered himself an active long-term investor, holding shares for about 15 years on average.
Woodford Investment Management
In April 2014, Woodford left his position as Head of British Equities at Invesco Perpetual and founded Woodford Investment Management LLP.
In April 2015, he founded the Woodford Patient Capital Trust, a registered investment fund.
In April 2017, Woodford Investment Management launched a second equity return fund – LF Woodford Income Focus. Woodford owned 29% of the ill-fated Utilitywise.
In March 2019, after two years of poor performance, during which the fund’s assets fell by more than £ 5 billion, the Sunday Times investigated the fund.
It found that the fund held less than 20% of its assets in FTSE 100 companies, up from more than 50% when it was created, and more than 20% of its assets were held by small companies in the alternative investment market.
On June 4, 2019, trading in the largest fund Woodford Investment Management (Woodford Equity Income Fund) was suspended. Many investors have withdrawn a lot of funds. You already know the rest.
Why was Woodford’s share income suspended?
After two years of poor performance, Woodford Equity Income came under scrutiny after the Sunday Times conducted an investigation that found the fund owned less than 20% of the assets of FTSE 100 companies, compared with 50% when it was first created.
Woodford Equity Income was suspended in June after investors flooded it with withdrawal requests, leading to the largest crisis in the investment industry in years.
Fund manager St James’s Place has canceled the contract with Woodford to manage three of its funds.
His empire collapsed when the Kent County Council withdrew a £ 263 million investment mandate. He then prevented investors from selling their assets in his £ 3.7 billion fund before being fired.
What happened to the funds?
The suspension eventually led Woodford to close the business in October.
Link Fund Solutions, which is responsible for the suspension and liquidation of the fund, announced in October that it would fire Woodford, liquidate the fund and return the money to investors.
The fund manager then announced that he would step down from his remaining investment funds, Woodford Patient Capital Trust and Woodford Income Focus Fund, and close his investment company.
What happened to the other Woodford funds?
Asset manager Schroeders took over Woodford Patient Capital in October following Woodford’s departure. The fund, now called Schroder UK Public Private Trust, sees Schroders charging a management fee of one percent per year based on the trust’s market capitalization, up to £ 600 million and 0.8 percent a year after that.
Woodford’s removal from his position as fund manager for Woodford Equity Income earlier this year meant that his only remaining stream of income came from the commissions of a small fund, Income Focus.
Administrators froze the fund in October following Woodford’s resignation. In December, Aberdeen Standard Investments announced the acquisition of the Income Focus fund. The £ 268m ASI Income Focus fund began operations again on February 13, ending a long period of uncertainty for investors.
What happened to the investors?
In January, Link Fund announced that investors caught in the WEI trap would face charges of £ 10m in connection with the closure of the fund. He elaborated on the £ 5 million in January costs since mid-October when he fired Woodford. A provision has also been made for additional costs of £ 5.3 million.
Around £ 2.1 billion was returned to the fund’s 300,000 investors in January at a payout of 46 to 57 pence per share, up from its starting price of 100 pence.
However, the illiquid companies still have £ 500 million in equity income fund assets. Given the coronavirus crisis, it is unlikely that much progress can be made
What is Woodford doing now?
Woodford and several colleagues at Woodford Investment Management were in talks with investors to buy back a number of the fund manager’s old investments.
In March, Sky News reported that the stock picker was in talks with institutional and asset managers to set up a mechanism to buy back some of WIM’s unlisted stakes.
He also reportedly came up with the idea of creating a new fund to manage dozens of new holdings. However, how this will manifest itself in the current crisis remains to be seen.
What did this saga mean for the investment industry?
The impact of Woodford’s collapse, especially on investor confidence, has not gone away.
Woodford’s troubles began when he put investors’ money in early-stage companies, and when people asked for their money back, he couldn’t sell the investment fast enough. The saga has highlighted the problems when highly liquid assets are held in daily traded open-ended funds.
The Financial Conduct Authority (FCA) has done little to mitigate the situation, instead reminding asset managers of their responsibilities and that suspension is an appropriate tool.
In 2020 a spate of property fund suspensions was seen after the pandemic raised uncertainty over its assets.
Ryan Hughes, head of active portfolios at investment platform AJ Bell, added that there has been little industry discussion on the appropriateness of using funds containing illiquid assets for day-to-day operations.
“It’s the elephant in the room, and asset managers don’t have the first mover advantage to do it, which means they’ll have to lead the regulatory body,” he said. “While conversations may well be taking place behind the scenes, they need to be accelerated and made public in order to regain investor confidence.”
“It is absolutely vital that the asset management industry properly learns the lessons to be learned and quickly or else miss out on a tremendous opportunity to help regain the confidence of so many investors.”
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