Investors in Neil Woodford’s flagship unit trust should prepare to lose up to 70% of their money held in the fund, financial advisers have warned.
Woodford Equity Income fund (WEIF) will be wound up in the coming months, Link Fund Solutions has decided, with Woodford fired from the fund and his name wiped from its listing.
“Although there were rumours this is truly shocking news,” says Adrian Lowcock, head of personal investing at Willis Owen, adding that it will result in the “complete demise” of the UK’s most famous fund manager.
With investors having to wait until the new to find out the value of their investment and get their money back, Lowcock adds, “sadly many people will be looking at significant losses”.
Winding up the fund now will allow money to be returned to investors through “a number of distributions” that are likely to begin in January, said Link, the authorised corporate director of the fund, in a letter to unit-holders on Tuesday morning.
Link says the size of this first cash distribution will depend upon how quickly the value of the fund’s assets can be realised.
Prepare for a 30-70% haircut
Investors in WEIF “should prepare to experience a loss of between 30% and 70%,” says chartered financial planner Martin Bamford of Informed Choice.
Bamford says his prediction of a 30%-70% “haircut” is based his calculation of the likely price of having to quickly sell “overvalued illiquid holdings”.
It may be shocking, but it allows investors to be prepared for a range of outcomes, he adds, with a 70% loss of their money in the fund being a “worst-case scenario”.
The timing of Link’s decision, says Darius McDermott at Chelsea Financial Services, “does seem a little odd and out of the blue – especially with Brexit possibly just days away”.
“At the end of the day, the most important thing is, whether this is a better outcome for investors?
“Link suggests that investors will get their money back faster than waiting for the fund to reopen, but I’m not convinced that is the case - December had been earmarked for a re-opening of the fund.
McDermott was one of several commentators to question whether Link’s move would not put further pressure on the valuation that can be eked out of the fund and returned to investors.
“This action also makes Woodford a forced seller of all stocks – stocks that the market place and short-sellers are all aware of,” he said. “It may well mean that less money is returned to investors, so the jury is still out on this one.”
The amount that investors will get back is the big question, agreed Lowcock, and it is difficult to provide an answer at this stage.
There are three main factors at play, he says: “First off the fund will remain invested until January and as such the value of the underlying investments can rise as well as fall.
“Secondly the unlisted assets are taking longer to sell which means they might have to take a bigger haircut on those investments.
“Finally the costs of winding up the trust will be higher than the normal fees for running the fund as all investments have to be sold.”
Only after all of that will investors get their money back, says Lowcock, so it is hard to put a figure on it.
“But they have already seen substantial falls in the price of the fund and only a strong rebound in performance before the fund is wound up would reverse that.”
McDermott also says the amount investors get back will also depend on how the broader UK market fares as the managers try to sell holdings.
“Brexit in the middle of all of this doesn't really help guess the general direction - especially this week.”
Looking at the 30-70% estimate he says, it also depends on when you are taking the starting point.
“If you go from the gating of the fund in June it is down some 16%, so 30%-plus may be right. But as I say, the stock market could rally which would help lesson the blow. So it's impossible to guess really.”
The current shape of the portfolio has not been made public, says Rebeca O'Keefe, head of investment at Interactive Investor, and the time horizon is also uncertain.
"It’s very difficult to speculate, but managers of both the liquid and illiquid books will be looking to maximise value for investors when it comes to selling those assets.
"But those liquidating the portfolio will also be mindful that what might have once been interpreted by the market as a ‘sell list’ could, in fact, have latent long term value. So there will be some hard bargaining, and it is all but impossible to put a time line or an estimate on this in terms of how much investors will actually end up with."
Woodford's other funds
The demise of WEIF will also have left investors in Woodford’s Income Focus fund worrying, while shares in Woodford Patient Capital Trust PLC (LON:WPCT) where the manager is expected to soon be replaced, were down 9% to a new all-time low around 34.32p on Tuesday afternoon.
A run on the Income Focus fund is possible if investors panic on this news, says McDermott, which could see another fund in the same situation.
“I really hope it doesn't come to that."