Woodford fund is ‘structurally impaired’, warns Morningstar

Difficult for Woodford to focus on investment conviction while managing liquidity

Morningstar labelled Woodford Equity Income fund as “structurally impaired” and downgraded it for a second time in a month.

The star fund manager’s £3.7bn Equity Income fund was frozen on Monday for the foreseeable future, and 28 days at a minimum, following “an increased level of redemptions”.

Peter Brunt (pictured), associate director of equity strategies at Morningstar, said “Following heightened levels of redemptions, the authorised corporate director and Woodford Investment Management (WIM) suspended dealing in this fund’s shares on 2 June 2019.

“Our most recent report on the fund in May 2019 cited ‘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.’  At this point the fund held a Morningstar Analyst Rating of Neutral.

“By suspending dealing in shares in the fund, WIM has the time to significantly increase the liquidity profile of the portfolio without triggering a fire sale of illiquid assets. With portfolio positioning now focused more on sourcing liquidity than on investment conviction, we consider the strategy structurally impaired in its ability to implement its investment process. With this further development, we are lowering our Morningstar Analyst Rating to Negative from Neutral.”

Morningstar had  already demoted it from bronze to neutral in May 2019. The fund was also downgraded from silver to bronze in May 2018, due to capacity concerns, as the fund invested in companies at the lower end of market-cap spectrum.

Woodford has told trapped investors he plans to bring “illiquid and unquoted stocks down to zero” and reinvest the capital into liquid large caps such as the FTSE 350 and FTSE 100.

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