Woodford Fund Closure: the Morningstar Reaction

VIDEO: Morningstar analyst Peter Brunt discusses what the closure of Woodford Equity Income means for investors and the industry

Holly Black 15 October, 2019 | 11:27AM
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Holly Black: Welcome to the Morningstar series, "Market Reaction." I'm Holly Black. With me is Morningstar analyst Peter Brunt. Hello.

Peter Brunt: Hi, Holly.

Black: So, we've just found out this morning that Link has taken the decision to close the Woodford Equity Income Fund. The fund suspended in June and had been slated to reopen once they had changed its portfolio in December. That's now not going to happen. Is this a surprise?

Brunt: A little bit of a surprise. So, it was always a possibility. So, as you said, they'd given December as a time when they were hoping to reopen the fund. Woodford Investment Management has been trying to reposition the portfolio. They've obviously found that harder than what they anticipated and Link Fund Solutions as the authorised corporate director have decided that it's for the best interest of investors to take control of that situation.

Black: Because crucially, Link makes his decision as the sort of independent body and not Woodford himself.

Brunt: Correct. So, they have a fiduciary duty to make sure that investors are best served, and they've decided that the best outcome is by winding up the fund now. What does that mean for investors? Well, the process is that the Woodford Investment Management will no longer be in control. They will no longer be the investment manager of the fund. Link Fund Solutions has appointed BlackRock, the manager for the listed part of the portfolio. The unquoted part of the portfolio and some of the very illiquid listed equities will be managed by Park Hill. They've been involved since the suspension and continue to be so. And they have to give a three month notice period. So, it's most likely that investors will receive some of their money back in January 2020. From that point on, it will be as when they're able to sell those assets without causing a fire sale.

Black: One of the big controversies around this is that Woodford has been continuing to charge a fee even while the fund has been suspended. And they say that's because, you know, there's rent to pay, staff to pay. Is that still going to be the case even when it winds out?

Brunt: Yeah, it's a good point. And they've come under a lot of criticism, rightfully so to some extent, for charging that full fee. Link has announced that the full fee will still be charged up until the commencement of the winding up, so January 2020. We're a little bit surprised by that, especially given that BlackRock and Park Hill are only going to be selling the assets down. They're not trying to manage the portfolio as Woodford was. They haven't given any concessions to that management fee. Upon the first distribution Link have said that the management fee will no longer be charged. However, there may be more costs involved for BlackRock and Park Hill to continue to do their job. So, it's actually unclear on what costs will be incurred during that period.

Black: And something else people will be watching closely is the Woodford Income Focus Fund and the Woodford Patient Capital Trust. I mean, what's going to happen there? Are we going to see those wind up, too?

Brunt: So, another good question. There's a significant risk for the business right now. There's two things that asset management firms rely on. One is fees. So, they haven't been taking fees on the Investment Trust for quite some time because it hasn't been performing and it only charges a performance fee. And they've just lost the income stream from the largest asset pool that they had. So, the whole firm is now receiving far less revenue. That's a big concern. And the other is trust. So, this whole episode has really brought about concern and people have just lost confidence in Neil Woodford. And I think without those two things, it makes it very difficult for an asset management company to operate. The Focus Fund is somewhere between £200 million and £300 million right now. That is probably enough assets to continue as a going concern, but whether investors will remain there, we don't know yet.

Black: And what does it mean for the industry as a whole? This is a fairly unprecedented situation.

Brunt: Yeah. I mean, it's massively unprecedented. It's a £3 billion fund that's been wound up. It hasn't happened before. What does it mean? It's underlining the importance between the making sure that there's a match between the vehicle requirements and the underlying asset pool. So, that is something that we've always looked at, but we're looking at more and more closely, and I think we're not alone in that front, and it also underlines the importance of trust in the industry and making sure that asset managers are fully transparent and give full disclosure where appropriate on what they're doing.

Black: Pete, thanks so much for your time.

Brunt: You're welcome.

Black: And thanks for joining us.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk