Points of View: Woodford
It has been a torrid period for former star fund manager, Neil Woodford, following the announcement that dealing in his flagship fund, Woodford Equity Income, has been suspended indefinitely after being overwhelmed by investors requesting their money back.
What went wrong for Woodford? In short, it is a fundamental flaw with open-ended investment companies (also known as an OEIC or unit trust). When investors wish to withdraw their money, a fund has to provide funds from its own pool of assets, and once these funds have been exhausted underlying investments have to be sold. Where Woodford has fallen foul is that a significant proportion of his portfolio was held in unquoted investments, and as redemptions have increased so the less immediately saleable unquoted element has increased to an unsustainable level. Woodford have therefore shuttered the fund to any further redemptions to allow for the repositioning of the unquoted investments in an orderly fashion in the hope of deflecting further financial penalty.
As Woodford has found out, holding too many unquoted companies in a vehicle where investors can ask for their money back at any moment can be dangerous. Such investment exposure is better achieved through a closed ended fund, otherwise known as an investment trust. When investors want their money back from this type of investment, they simply sell their shares on the stock market. The price obtained may not always be what they would hope to get, but the underlying manager will not be forced into having to sell investments at the wrong time and for a poor price. This gives the manager time to allow their investments to come to fruition and be realised in an orderly manner.
Ironically, Woodford also offer investors just such a closed ended vehicle, the appropriately named Patient Capital Trust. This also holds investments in unquoted companies, and has considerable overlap with the open ended fund. Whilst the share price has suffered alongside the open ended fund, the shares continue to be traded giving investors more choice over their investment decisions.