Investors in the UK-based Woodford Equity Income fund have been unable to withdraw their money since 3 June. What’s happened, and what are the lessons for Irish investors?
Woodford Equity Income was formed in 2014 and quickly grew to over £10 billion in assets. Some of those assets were invested in smaller, private companies which cannot be easily – or quickly – bought or sold.
At the same time, performance of the fund has been disappointing, prompting investors to ask for their money back.
But the rush of withdrawal requests has forced Woodford to close the fund, preventing investors from buying in or selling out. The intention is to give the fund some breathing space to liquidate its smaller holdings to zero.
What’s the risk to investors?
Investors in Woodford Equity Income have two main problems. First, they can’t get their hands on their cash. It’s unclear when the fund will open again, and it could take some months.
Second, the fund’s position as a forced seller means it is hard for it to extract full value for the investment it holds. And that will put further pressure on investor returns.
Who is Neil Woodford?
Neil Woodford is a one-time ‘star investor’, feted as having a Midas touch for choosing investments.
It’s been reported that a £10,000 investment in his funds at his previous firm, Invesco Perpetual, would have become £250,000 over 25 years. His funds avoided some of the losses experienced by other funds in the dot.com bubble and the banking crisis.
But when he struck out in his own name in 2014, his investing strategy changed as he moved away from large income-producing stocks like global tobacco, and towards more illiquid investments, such as early-stage science businesses.
Are Irish investors affected?
There are Euro-denominated ‘feeder’ versions of Woodford’s fund, and it’s possible a small number of Irish-based investors are affected.
But the majority of Woodford investors are UK-based.
Is my fund likely to close like this?
Refusing withdrawals from a fund is a drastic step, and the risk is extremely low for most funds.
However, it is a possibility, particularly for funds which focus on assets that take a long time to sell – such as property, or businesses that are not listed on a stock exchange.
That’s why many of these funds hold a substantial chunk of their value in cash. This gives them a buffer in order to meet day-to-day withdrawal requirements.
What are the lessons for Irish investors?
For Moneycube, the Woodford episode highlights three important lessons for Irish investors.
First, take care when investing in illiquid assets – whether through funds or directly (property, anyone?). These assets take time to sell, so you risk losing value if you need to exit in a hurry.
If you do have some of your savings tied up in illiquid investments, diversify. We’d recommend you strongly consider placing a portion of your wealth in assets which can readily be turned into cash – for example listed shares and bonds. The vast majority of Moneycube investors’ savings are placed in liquid assets.
Second, be wary of the claims of star fund managers. Past performance is not a reliable guide to future returns. What counts are the current holdings of a fund, and its investing plans – not the past heroics of its managers. Passive management – or active management based on a strategy and team – rather than a single individual, is more resilient.
Lastly, remember time is an investor’s friend. There’s every chance that the investments Woodford Equity Income is now selling will come good in the end. But it won’t happen quickly – so those with a long-term view will reap the benefit.