Woodford liquidity is ‘doubly problematic’ in pre-profit holdings

Rival fund house warns on perils of secondary market transactions in unquoted companies

Woodford holdings in loss-making firms are “doubly problematic” from a liquidity perspective, Amati Global Investors boss Paul Jourdan has warned in a note to markets that seeks to distance the boutique firm from the Equity Income fund suspension.

Jourdan (pictured) has detailed the liquidity of its UK Smaller Companies fund, stating 5% of the fund would take more than a month to liquidate compared to 65% of the Woodford Equity Income fund.

The weighted average market capitalisation of the fund is £880m and all holdings are listed, Jourdan said.

Woodford faces headache with loss-making firms

While unquoted companies are less liquid than listed small-cap stocks due to the bespoke legal agreements that are needed to conduct a secondary transaction, the situation is “doubly problematic” for firms that are loss-making, Jourdan said.

“If a holder wants to sell to a new investor (a ‘secondary sale’) they are competing with the company itself, which may be wanting to issue new shares to raise further cash for the business, and so the company has an incentive to block the secondary sale,” he said.

Woodford Investment Management would not comment when asked by Portfolio Adviser how many of the Equity Income fund’s unquoted holdings are loss making.

As recently as May, Neil Woodford was touting the valuation opportunity in loss-making companies pointing to Amazon as an example of a company that was shunned by markets when it listed in 1997 before it was profitable.

In a blog post published a month before Woodford Equity Income gated, he pointed to Inivata as a holding in the Woodford Patient Capital Trust for which he had “high hopes”. “It has as yet, no sales, profits or earnings and it pays no dividends. In our view, however, it is profoundly undervalued,” he said.

Common holdings with Woodford Equity Income

Amati UK Smaller Companies has some common holdings with Woodford Equity Income, such as Watkin Jones, Jourdan acknowledged. “We saw the potential overhang of over 10% of the company cleared in two trading days, and we were amongst those who added to our holding.”

Watkin Jones revealed in a filing from 6 June, two days after the Woodford Equity Income suspension, that Woodford Investment Management’s stake in the construction company had reduced from 9.19% to below 5%.

Amati is the first asset manager to explicitly distance themselves from the liquidity issues surrounding the Woodford Equity Income suspension.

However, UK listed real estate company Phoenix Spree Deutschland issued a regulatory filing the day after the suspension to clarify that it was unaware of any holding in the closed-ended fund by any funds managed by Woodford Investment Management. The notification was prompted by investor enquiries.

Crunching the numbers on liquidity

Amati monitors the average daily turnover of portfolio holdings and the amount of time it would take to liquidate positions if it traded at that level each day, he said. “However, we regard these numbers with caution, as any one of the stocks we hold can trade much larger numbers than the daily average on occasions when there is a need to do so, whilst equally, in a market panic, liquidity for sellers declines steeply.”

Tilney managing director Jason Hollands notes markets like Aim have no formal minimum free float requirement.

Hollands said: “It is of course important to understand that the liquidity of a position will be influenced by both the market cap and typical trading volume in the stock, but also the size of the overall share register in the hands of a particular fund or manager. A small fund is much better placed to invest in smaller Aim shares and micro-caps than very large funds.”

Amati spells out liquidity compared to Woodford Equity Income

30 June 2018
Woodford Equity Income Fund*
30 April 2019 Woodford Equity Income Fund*13 June 2019 TB Amati UK Smaller Companies Fund**
Bucket 1 (1-7 days)21%8%59%
Bucket 2 (8-30 days)24%29%36%
Bucket 3 (31-180 days)30%32%4%
Bucket 4 (181-365+days)25%33%1%
Source: Letter from FCA to Treasury select committee/Factset and Amati Global Investors

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