Neil Woodford’s decision to eradicate the tail of unquoted companies from his flagship Equity Income fund might be too little too late as investors suffer from Woodford-fatigue.
On Friday, the star equities manager 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 “over time”.
Dennehy Weller & Co managing director Brian Dennehy says investors are getting tired of the ongoing Woodford drama.
“As with Brexit we all need to move on,” Dennehy says. “We should all wish him luck in turning this around, because when trust breaks down with such a high-profile figure it impacts on the whole industry and its reputation.”
‘It’s been a mess’
“It’s been a mess for the last year,” Ben Yearsley, director of Shore Financial Planning says of Woodford’s situation. “It’s a wake-up call to the sector that you need to have liquid assets in your fund.”
He thinks the star manager’s ambition to scrap all unlisted investments from the £4.3bn Woodford Equity Income fund “will simplify things massively going forward” and should help quell some of the noise.
“You can then take the call on whether you want to buy Neil Woodford or not without the additional noise that’s been around in the last six months which has got quite personal in some cases.”
Part of the reason the drama has dragged on so long is because Woodford and his team were initially slow to react and were caught out by the severity of outflows, says Adrian Lowcock, personal head of investing at Willis Owen.
“The recent news suggests to me that they are finally getting on top of the issue and looking to make changes which will remove the issues the fund has had with unlisted equities permanently,” he says.
Not adhering to the spirit of the rules
But Woodford will have to overcome some serious trust issues as some of his previous attempts to stay within the Ucits rules on unquoted stocks, including transferring £73m of unlisted securities into Woodford Patient Capital in exchange for a 9% stake, have rubbed investors the wrong way.
Even more controversial was the revelation that a trio of his unquoted stakes had been quietly listed on the Guernsey stock exchange. This allowed him to do away with Benevolent AI, which at 4.38% of the portfolio posed the biggest threat to the 10% limit.
A source told Portfolio Adviser that while these listings comply with the FCA’s rules on unquoted companies they do not adhere to the spirit of the rules as there is no demonstrable liquidity.
“I think ‘Invisible Private listing Overseas’ is perhaps a more appropriate term when we are talking about the Channel Islands,” they said.
Woodford has benefited by other unquoted stocks listing in the Channel Islands in recent years. Ibiza property developer Sabina Estates suggested a Guernsey listing to Woodford’s firm and was admitted to the exchange at the end of 2017. Woodford holds a 1.83% stake in the company in his Equity Income fund.
Other Equity Income holdings, like Welsh-based biotech firm Proton Partners, which is 1.43% of the fund, have found a home on less liquid exchanges like London’s Nex Exchange, that bills itself as a stock market for “ambitious, growth enterprises”.
A spokesperson for Woodford Investment Management put the Equity Income fund’s unquoted exposure at 8.5%. This does not include Oxford Nanopore, currently the fund’s largest unquoted holding at 2.52%, which is due to IPO at some point in the next 12 months and therefore is allowed to be classified as a listed security.
Including Oxford Nanopore and the trio of unquoted stocks that were listed on the Guernsey exchange, the Equity Income fund’s unquoted holding would be 18.2% based on his holdings as at 31 March 2019.
Performance needs to pick up
Lowcock believes in order for investors to regain confidence in the star manager they will need to see performance improve.
As the value of the Equity Income’s listed investments has tumbled during the fund’s three-year performance slump, prompting redemptions, the weighting of illiquid investments has risen putting Woodford at risk of a passive breach of the FCA’s limit.
Lowcock says Woodford has been “a victim of unfortunate timing” but admits “the situation has been one of his own doing”.
“Another year or so and some of the unlisted stocks may have made their way to the full market and the fund shrinking in size wouldn’t have been as big an issue. Having illiquid, unlisted stocks in an open-ended investment product has rarely proved to be a good idea and has been a hard lesson for Woodford.”
“The timing of this is largely out of Woodford’s hands but it is important to remember that contrarian investors can have long periods in the wilderness as they wait for that change to happen. Events like Brexit are having a big impact on Woodford and the longer that drags on the longer it will take for his views to be realised. I do agree with Woodford’s positive take on the UK economy and a resolution to Brexit will be good for the market.”
