Research giant pans Woodford’s approach to liquidity

Link Asset Services is ultimately responsible for Ucits compliance, says Woodford

Woodford

Fund rating giant Morningstar has downgraded Woodford Equity Income for the second time in a year as it pans Neil Woodford’s attitude to liquidity.

The fund has now fallen to an analyst rating of neutral. In May 2018, it was downgraded from silver to bronze due to capacity concerns as the fund invested in companies at the lower end of market-cap spectrum.

In an announcement on Monday afternoon, the global fund research business raised concerns about fund positioning.

“Persistent redemptions, underperformance, and stock-specific issues, combined with the manager’s relentless willingness to push the portfolio to its liquidity limit, have resulted in portfolio positioning that we consider extreme,” said associate director for manager research Peter Brunt, who specialises in equities strategies.

“Contrarian investing comes with a degree of risk, and issues can be expected from time to time. However, the nature of some of the stock specific problems and their respective position sizes, combined with the extreme portfolio positioning, give us cause for concern.

“While we acknowledge that there may be unrealised value in the portfolio, the aforementioned have led to a lower level of conviction in the strategy’s ability to consistently outperform over the long term.”

This month, Woodford announced he would take the level of his less liquid private companies to “significantly below 10%” by the year’s end with the aim of ultimately bringing that exposure to zero. In March, Woodford Investment Management announced it would shift £73m of unquoted stocks from its Equity Income fund into the Patient Capital Trust in exchange for new shares at net asset value.

ACD ‘ultimately responsible’ for compliance

In a written statement, a Woodford spokesperson said Link provides independent liquidity oversight as the fund’s authorised corporate director (ACD).

The spokesperson said: “It undertakes its own oversight of the fund and is ultimately responsible for the fund’s compliance with the Ucits investment restrictions and requirements regarding liquidity and valuation.

“Liquidity limits and stress testing are all agreed with Link and monitored by both Link and Woodford and via discussions with NT Depository. The fund is managed so it can stay within its agreed liquidity limits and these are set conservatively so the fund can comfortably meet any redemption as they fall due.”

Portfolio Adviser has approached Link Asset Services for comment.

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