Lee Gardhouse, Chief Investment Officer 5 June 2019
We understand the last week has been unsettling. News that dealing in Woodford Equity Income has been suspended will be concerning to the investors that have backed this fund, ourselves included.
But it’s important to start with the facts.
While the trading suspension is very frustrating for those who need the capital now, it’s a protection against risk for investors.
Link Fund Solutions, the fund’s Authorised Corporate Director, took the decision to suspend dealing in the fund in order that Neil Woodford could concentrate on managing the fund, in the interests of existing investors. Over the past year, redemptions (investors selling the fund) have forced Woodford to sell easily-tradable stocks.
This meant the portion of less-liquid, or hard-to-trade, and unquoted companies in his portfolio rose. It also meant the market valued the tradable stocks at less than they were worth – as they knew constant redemptions would force Woodford to sell.
We’ve been speaking to Woodford for some time about the number of unquoted and hard-to-trade companies in his portfolio. We have encouraged him to address these issues, and he made a commitment to reduce this part of the portfolio in March. Now, he has the time to do this without also having to manage fund flows.
Woodford Investment Management has not gone under. This suspension of trading gives Woodford some breathing room to get his fund into the shape he wants. And furthermore your assets are held safely by an independent company called Northern Trust, a financial services firm with one of the highest credit ratings. This is standard practice for fund management to reduce risk to investors.
Taking the long-term view
While we don’t underestimate the impact of two years’ bad performance, we are advocates of long-term investing. Over the last 10 years, Woodford has doubled investors’ money, even after the recent falls. Since inclusion in the Wealth 150 list in 2003, he has more than tripled investors’ money, turning £1 into £3.23 (source: Lipper IM, 05/06/19). Past performance is not a guide to future returns.
|Annual percentage growth|
| May 14 -
| May 15 -
| May 16 -
| May 17 -
| May 18 - |
|LF Woodford Equity Income||N/A||-0.3%||14.1%||-11.3%||-17.8%|
|LF Woodford Income Focus||N/A||N/A||N/A||-2.3%||-17.8%|
Past performance is not a guide to the future. Source: Lipper IM to 31/05/2019. N/A - Where no data is shown, figures are not available.
The long term is also how we think about our Wealth 50 (and the Wealth 150 before that). Our fund choices, for the most part, have done better than their sector averages and benchmark. We're proud of this, and the knowledge we've helped investors along the way.
How the Wealth 50 works
We carefully choose funds for our Wealth 50 list based on their future performance potential. We use a strict quantitative and qualitative analysis process to identify the funds we think are the best in class.
Only once we have identified those funds with potential, do we then use the negotiating power of 1.2 million clients to bring down the costs of investing.
We negotiate hard on your behalf to lower fund costs. In lots of cases we've got significant discounts for you. And all the benefit gets passed on to you. Ultimately, we only do well if our clients do.
It's important to make clear we never take payment or commission for funds to appear on the Wealth 50. We only look at performance potential.
Ultimately we want to find managers with great stock-picking talent – those who invest in great companies, even if they're in an area that's out of favour at the moment.
No manager is infallible though, and no-one can make the right calls every time. When they get it wrong, the fund will fall in value.
Why we removed Woodford from the Wealth 50
We don't make any investment decisions, or changes to the Wealth 50, lightly. Time, consideration and thought goes into every investment decision we make. It's what we spend our waking hours doing, and we do it because we also want to help our clients make good long-term investment decisions.
We understand that the dealing suspension has come as a shock to investors. Our continued support of Woodford was based on our conviction he would deliver positive long-term returns.
His stock-picking ability, track record, team support, and the fact that he was willing to back his views with conviction meant he earned his place on the list.
The flexibility of his approach, offering investors diversification, saw him find value in a different way to his peers. He got the calls right on tech, pharmaceuticals and tobacco.
But we also recognise that markets are not static. When any fund changes dramatically in size, if a fund manager changes their process, or indeed, if a fund is no longer available to investors, then we have to review our position.
We will be taking this time to talk to Woodford, Link and the regulator to ensure we continue to best serve our clients. We’ll keep our clients up-to-date every step of the way.
We’ve also taken the decision to waive our charge to hold the Woodford Equity Income Fund while dealing is suspended. We don’t think it’s fair to charge our clients a fee while they can’t trade in this fund. We have been in communication with Woodford Investment Management to explain why we think this is the right thing to do and have put pressure on them to do the same.