Our Blog

Dinosaur
Icon

Neil Woodford’s fund suspension and why we work with Financial Express

by

You will have heard me talk about Financial Express (FE) quite a lot, as they help us design and build our portfolios.

You may also have read in the papers this week, or heard on the news that a high profile fund run by Neil Woodford is suspended trading, as it cannot keep up with withdrawal requests from unhappy investors.

Here’s a link to the Guardian’s (paywall free) article about Woodford’s fund.

No Gibson Lamb clients invest in this fund. However, it does highlight one of the many reasons we work so closely with FE.

FE have compiled a list of ‘approved funds’, and on those funds they monitor liquidity and will have a note from the analyst as to when they believe the fund will hit capacity issues. Runs on funds (where investors start taking lots of money out) are tricky to spot and identify but again they have systems in place which track inflows and outflows which will feed into the analyst team.

With Woodfrod specifically, it seems useful to summarise their thoughts a year or so back when they removed from the approved list, not that we were ‘using it’ at the time.

“When Woodford launched Woodford Equity Income, his aim was to replicate the investment process which granted him success at Invesco Perpetual. By doing so, the fund manager has the freedom to invest a maximum of 10% in non-UK listed equities. That 10% capacity has always been used by Woodford to invest in unquoted and early-stage companies, as he believes they can boost the potential for capital return of the portfolio. However the capital gain generated from his investments in unquoted companies has been questionable.  On the contrary, most of the alpha generation [alpha meaning the value Woodford added as the fund manager, compared to his peers] came from contrarian bets on few industries (away from Banks around the Great Financial Crisis, picking up Pharmaceuticals early in 2012) and stock picking in his top 10 large cap/multi nationals holdings.

There was also a potential issue around the exposure to unquoted and smaller companies. First it brings some liquidity risk – Woodford’s clients are typically income seekers and do not need this kind of exposure.

Woodford had several stock picking issues over 2017. As the investment team spent too much time focusing on smallcaps, we believe those mistakes were due to poor allocation of analytical resources, and not to bad luck. Our data also indicates that Neil Woodford generated alpha from contrarian industry bets. From the EU referendum in June 2016, we observed that the share price of Brexit-related stocks traded at discount to fair value. The fund added significant capital to those names, as well as initiating positions in UK Banks. We believe that contrary to previous industry calls, this Brexit / domestic bet is not linked to a structural transformation of an industry (like Pharma in 2012), but to a political bet. We don’t believe Woodford has an advantage in calling the politics right.”

I hope you agree that in this instance, FE’s processes worked well and if we had been recommending that particular fund, we would have recommended selling it when the above note was issued.

The suspension is a reminder that all funds – even equity funds like this one – can suspend trading under certain circumstances. We have highlighted that property funds are particularly vulnerable to suspension due to the time it takes to sell a physical building, but it isn’t commonly understood by investors that ALL funds can suspend trading.

I hope that’s an interesting insight to how we work closely with Financial Express and constantly monitor the funds we have recommended.