If you have any interest in investments you will most probably have heard of the ongoing saga with fund manager Neil Woodford and his Woodford Equity Income Fund over the last few weeks.
Whilst distressing for those that have money invested in this particular fund, it’s important to understand what has happened so you can check whether something similar could ever happen to your own investment funds.
Neil Woodford – what happened?
Neil Woodford is probably the most famous fund manager in the UK and got to this status through many years of positive investment performance. At one stage even the BBC wrote a story with the headline ‘Neil Woodford: The Man Who Can’t Stop Making Money’.
He previously worked for large investment firm Invesco Perpetual and managed their Income and High Income funds. He ended up managing £30 billion and it’s highly likely your pensions or investments had some sort of exposure to Neil Woodford. Part of his success came when he decided not to get involved in tech stocks back in 1999 which eventually became a bubble and crashed.
In April 2014 he left Invesco Perpetual and set up his own company Woodford Investment Management. The aim was to manage a fund very similar to the one at Invesco Perpetual and it started well. At one point there was £10 billion worth of assets inside the fund.
But, there is a fine line between great performance and luck when it comes to investing.
Fast forward to today and the Woodford Equity Income Fund is suspended, meaning you cannot get your money out of the fund.
It turns out the fund was holding quite a bit of illiquid stock. Illiquid stock is shares in companies that can’t easily be traded because it’s privately held. Unlike shares in the big companies that you can buy and sell easily on a stock market exchange like the London Stock Exchange.
A period of bad performance for Woodford led to lots of people selling out of the Woodford Equity Income Fund. This is not a problem usually if you have stock that you can sell easily on a stock exchange. But if you have lots of illiquid stock then you can’t quickly sell it. Hence the suspension.
Checking your own investment portfolio
Suspending an equity fund is very unusual. It has happened many times with property funds because as you can imagine, property is not liquid, it’s not easy to sell quickly if lots of people want their money back.
But for equity funds, as long as you are investing in shares on a stock exchange, it’s always easy to sell them when you need to.
If any of the funds you hold contain shares in companies not listed on a stock exchange, also known as private equity, then you may need to look further. Your fund is under threat from being suspended if the same thing happens like it did to Woodford.
Bad performance + people wanting money out quickly = suspension.
Once an equity fund is suspended it’s probably likely that people are going to leave in massive numbers once the fund re-opens.
Currently the Woodford Equity Income Fund is down to around £3 billion at the time of suspension and it will be interesting to see what happens next once it’s reopened.
If you are concerned about holdings in the Woodford Equity Income Fund or having illiquid stocks in any of your other investment funds then please get in touch so we can carry out a full review for you.
I’m pleased to say we did not recommend the Woodford Equity Income Fund. Instead we recommend liquid diversified portfolios at low cost that aim to deliver the market return for the level of risk you are comfortable with.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
