Fortunes tumble for the UK’s highest-profile fund manager after he suspends flagship equity fund.

Investor pressure is mounting on celebrated UK fund manager Neil Woodford after yesterday’s decision to freeze withdrawals from his largest equity fund. The move was taken to stem further haemorrhaging after Kent County Council requested to pull £250 million ($317 million) in pension investments from Woodford's Equity Income Fund, citing continued underperformance.

In a statement on its website, the Oxford-based asset manager said that it will use the suspension period to reposition holdings to "more liquid investments" and safeguard remaining clients. It is unclear how long the gating will last. Investors have reportedly withdrawn around £560 million from the fund over the past few weeks, which returned 18 per cent in its first year, and was managing £10 billion at its peak two years ago.

Capital flight leading up to Monday's suspension, with further redemptions knocking, has led UK investment platform Hargreaves Lansdown to drop the fund (valued by Morningstar at £3.7 billion) from its preferred Wealth 50 list after trading was halted.

As the news triggers further setbacks for the firm, here is some industry reaction.

Darius McDermott, managing director of Chelsea Financial Services
“It is not a good sign, nor a good thing for the industry, that a flagship UK equity income fund has to suspend trading.

“Unfortunately, it will have become impossible for Neil to run the fund, given the pace of redemptions he has had to deal with. It is our understanding that the ACD took the decision to suspend trading on the back of the recent increase in redemptions. This is in line with the FCA's encouragement of ACDs to act on potential negative outcomes for investors.

“While it will be worrying for investors and frustrating for those that would like to access their money, it has been done for their benefit.

“Neil Woodford is probably the most well-known fund manager in the UK and, over more than three decades, he has produced good returns and has a loyal following. However, over the past couple of years, the performance of Woodford Equity Income fund in particular has been disappointing. Over the past 12 months, the value of the fund has fallen about 18 per cent.

“This underperformance has been due to a number of factors. Firstly, Neil's style has been out of favour. He holds many unloved and undervalued UK companies, which are domestically-facing. But as Brexit drags on and on, they are not being given the opportunity to recover.

“There have also been a number of stock-specific issues. The knock-on effect is that the fund has suffered large redemptions, as many investors have taken their money elsewhere. This, in turn, has meant Neil has been a 'forced' seller of some of his stocks, even if they have have done well, in order to meet those redemptions. It's a vicious circle.

“We will have to wait and see what action is taken next. But I would urge investors not to panic. As I said, the suspension of trading is in the interest of shareholders, so Neil is not forced to sell holdings quickly, at a lower price.”

*Source: FE Analytics, total returns in sterling, one year to 31 May 2019.

Adrian Lowcock, head of personal investing, Willis Owen
“The fund has materially changed over the past few years, in part reflecting Woodford’s view on the value opportunities available in the UK following the Brexit vote, but also as he looked to keep his favoured (unlisted) investments as money flowed out of the fund. The result has been an increased exposure to mid, smaller and unlisted companies. As outflows have continued, the problem of holding unlisted stocks in an open-ended vehicle has become more serious, leading to creative methods being applied to meet investors’ demands.

“Investors will understandably be concerned and, unfortunately, while the fund is suspended they will not be able to get their money. The suspension is likely to result in further outflow requests once the fund reopens, putting more pressure on Woodford. But it does give him time to find a solution and restructure the portfolio to be suitable in the current climate. This would likely impact performance of the fund in the short and medium term.”

Hector McNeil, co-founder and co-CEO of HANetf
“The gating of the Woodford fund should be a wake-up call to all investors. We have long argued that intra-day liquidity is a huge advantage that ETFs offer over traditional funds – regardless of market conditions, an investor can trade in and out quickly and get their money back – something possible with the many Equity Income ETFs that are now available.

“Having paid significant fees for underperformance, Woodford’s investors are now having salt rubbed in their open wounds as they cannot get their money back to redeploy. Given regulatory and investor focus is shifting towards value for money and investor protection, this incident could be the wake-up call that catalyses wholesale investor migration towards ETFs. As an industry, we have argued that ETFs are a superior distribution technology because they offer transparency, liquidity and market access at low costs, and it is exactly these features that many Woodford investors now wish they had – the transparency to know about unlisted and illiquid securities risk and the liquidity to trade and exit at a time of their choice.

“The disciplines of running an ETF make a scenario such as this remote. There has been much speculation in the press around ETFs and what would happen in times of volatile markets. It’s interesting that such an event as what has befallen Woodford if it had been in the ETF world would have been seen as catastrophic. ETFs almost universally have liquidity screens to prevent such events and investors should use this event as a wake-up call.

“Following on from Terry Smith’s recent emerging market woes, it is very evident that the star fund managers business models are under significant stress and helps highlight the clear benefits of the ETF wrapper.”