When Neil Woodford announced he was blocking withdrawals from his flagship LF Woodford Equity Income, it undoubtedly came as a shock to many investors who had their money with the former star fund manager.
Unfortunately, it doesn’t look as if Woodford is going to allow investors to access their money anytime soon. His flagship fund has been suspended initially for 28 days, with a review scheduled for the end of that period. But it could be months before the suspension is lifted.Â
Time is required
Woodford suspended withdrawals because he couldn’t meet the cash calls fast enough. The problem is, by gating the fund, when it resumes trading there’s likely to be a deluge of withdrawal requests, which is only going to pile more pressure on the fund manager.
Most investors and investment advisors will likely hit the sell button when trading resumes, which means Woodford will have to prepare for this outcome. He’s already made it clear the fund will be looking to liquidate all of its private holdings, which will eliminate the liquidity issue that caused the problems in the first place.
If Woodford makes good on this promise when the fund eventually resumes trading, there should be an orderly exodus as the manager will be able to sell investments into a liquid market.
Big unknowns
What we don’t know at this stage is how long it will take to reduce Woodford Equity Income’s exposure to private companies to zero, and how much money investors will lose in the process.Â
As Woodford is the largest single investor in some of the holdings, selling his stake at a price above, or at the value he bought in the first place, might be difficult, and it certainly won’t happen overnight.Â
Indeed, some City analysts have speculated it could be up to 12 months before Woodford completes this aim and allows trading to resume.
Still, while he tries to offload his private assets, the bulk of the portfolio, which is invested in public stocks, should continue to produce a return for investors. This means, even in the worst possible scenario, investors are unlikely to lose all of their money. Nevertheless, at this stage, it’s impossible to tell how much money investors could lose or if they are likely to lose any money at all.Â
A plan of action
Personally, if I had money invested with Woodford today, I’d try not to panic. The gating is disappointing but, at this point, it seems to be the best solution to a bad situation.
Woodford needs to restructure his portfolio to ensure investors get the best deal possible, and he can’t do that if he has to sell assets at fire sale prices. The current suspension gives him some breathing space to unwind the portfolio at the best possible prices.
In the meantime, I think it’s best to try and focus on the positives and not worry too much about the fund suspension. It’s highly unlikely investors will end up losing all of their money and, if there’s a sudden improvement in the fortunes of UK-focused dividend stocks, which the Woodford Equity Income Fund has a high allocation to, there may be no losses at all.