Neil Woodford shocked us all Tuesday when he suspended trading in his Woodford Equity Income fund, after around £560m had been withdrawn in the previous four weeks. A request from Kent County Council for more than £250m was, apparently, the final trigger.
The problem is that shares have to be sold to meet the demand for withdrawals, and Woodford has a lot in illiquid and non-quoted equities, which are harder to turn into cash.
Apology
Woodford expanded on his decision Wednesday, apologising and saying the suspension was “necessary to protect investors’ interests.” He added that markets were “anticipating the fact that we would have to be sellers of stocks to meet those redemptions,” suggesting the only way to sell off large amounts of stocks was at reduced prices. He is, apparently, going to use the suspension period to completely exit illiquid and unquoted stocks.
After a first year on his own following his lengthy success at Invesco Perpetual, when he provided investors with an 18% return against 2% for the wider market, things have turned sour.
Fellow Fool writer G A Chester observed last month that Woodford had radically changed his approach to risk, moving away from his previous conservative strategies and investing in higher-risk startups.
His Equity Income fund has become increasingly weighted towards illiquid and unquoted stocks, as holdings of more liquid (and dividend-paying) stocks have been sold down as the cash withdrawals from the fund have accelerated.
Bad choices
Even among big quoted stocks, Woodford has made some clearly bad investments. All investment managers make bad choices sometimes — even Warren Buffett bought Tesco at just the wrong time. But it’s unfortunate Woodford has seen several high profile investments turn bad.
It’s not just with hindsight that I say it, but I think his big investment in Purplebricks was a howler — it really seemed like an overstretched bubble stock to me, and its share price has slumped by 70% over the past two years. Provident Financial has seen a 75% share price fall in the same period, and Kier Group‘s 40% crash on Monday has pushed it to a two-year drop of 85%.
What I’d do
Looking at the Woodford Equity Income fund’s current holdings, I’m pleased to see top housebuilders in there, including Taylor Wimpey and Barratt Developments. Imperial Brands is there too, and I see that as a solid income stock. But for a fund that says it targets “quality companies that can deliver sustainable dividend growth,” I’m seeing a concerning number of low- and no-dividend investments.
I see Woodford’s investing choices biased towards a bull market, which is exactly what we don’t have in the current tight economic climate, though that looks set to change now.
What would I do? I’d never hand money over to someone to manage for me in the first place. I just don’t like the inherent conflict of interest. For a pooled investment, I much prefer an investment trust.
But if I did have money in the Woodford Equity Income fund, I’d be taking a close look at the fund’s constituents once the current rebalance is complete before I made a decision.