Woodford Equity Income Fund shareholders found out on Tuesday how much cash they’ll receive in the first payout since the fund’s suspension. Unfortunately, the news wasn’t good.
According to a letter published by fund administrator Link Asset Services, Equity Income Fund shareholders will receive between 46.4p and 59.0p per share, depending on which class of share they hold.
This payout is expected “on or around 30 January 2020.” Further payments should follow but, as I’ll explain, shareholders seem likely to face significant losses.
Big losses likely
For shareholders holding accumulation units — where dividends are automatically reinvested — January’s payout will be between 56.5p and 59.0p per share.
Link says the value of the Equity Income accumulation units fell by 14.9% between 3 June 2019 (when the fund was suspended) and 8 January. This compares to a gain of 9.4% for the FTSE All Share Total Return index over the same period.
You might have expected a better performance than this, given the wider market has performed well over the last three months. However, the fund’s illiquid investments seem to be holding back its performance.
Although the FTSE All Share Total Return index has risen by 6.2% since 15 October, the Equity Income Fund has only risen by 1.2% over the same period. Link says that this is due to “the revaluation and disposal” of “certain unquoted assets in Portfolio B.”
Illiquid holdings are a worry
When the fund went into liquidation, it was split into two portfolios, A and B. Portfolio B refers to the illiquid holdings from the Equity Income Fund. Portfolio A contained more easily sold stocks, such as shareholdings in FTSE 350 companies. These represented about three-quarters of the fund.
This month’s payout represents the liquidation of 90% of Portfolio A, which Link says has realised £1.9bn. The liquidation of Portfolio B is taking longer and is expected to prove much more difficult.
Link Asset Services has appointed specialist firm Park Hill “to explore opportunities for the sale of assets” in Portfolio B. But, so far, there’s been no update on progress.
I expect these illiquid holdings will be very difficult to sell without heavy discounting. Unfortunately, I think payouts from Portfolio B will be small and slow to arrive.
How to avoid the next Woodford
It’s no secret that one of the biggest problems with the Equity Income Fund was that it contained too many illiquid holdings. Most of these were early-stage growth stocks that didn’t pay dividends.
Woodford drifted away from his core style. If he’d stayed true to his historical focus on FTSE 350 income stocks, I think his funds would still be trading and their performance would be improving.
This is a timely reminder of the importance of US billionaire Warren Buffett’s rule that investors should stay inside their circle of competence. Don’t invest in things you don’t understand.
Investors in stock market funds shouldn’t need to understand every company in which their fund is invested. But it’s important to keep an eye on the type of company that’s being bought and look for any changes.
If a fund you own has started to buy different types of companies, ask why. You pay the fund manager’s wages, after all. You’re entitled to an explanation.