June 10, 2019 / 3:43 PM / 4 months ago

Explainer: How the door slammed shut at British money manager Woodford's fund

LONDON (Reuters) - British money manager Neil Woodford has barred investors from taking cash out of his flagship fund, sparking client anger and spurring the Financial Conduct Authority (FCA) to examine what is a highly unusual move for a UK retail-focused equity fund.

Neil Woodford, founder and fund manager at Woodford Investment Management, is seen in this undated handout picture released on June 10, 2019. Jonathan Atkins/Handout via REUTERS

Since Woodford’s 3.7 billion pound ($4.7 billion) LF Woodford Equity Income Fund suspended withdrawals on June 3, the share price of his listed fund has dropped, along with the value of shares of many of his biggest fund holdings.

WHAT CAN INVESTORS DO?

The short answer is nothing for now. Their money remains invested in the LF Woodford Equity Income Fund and can only be accessed when the suspension is lifted.

Woodford has posted a Q&A on his website detailing the process, explained his reasoning in a video and has pledged to reopen as soon as possible. bit.ly/2I6khBq

The fund’s suspension must be reassessed at least every 28 days. While in theory it could re-open overnight, observers expect the closure to last a number of weeks.

WHY DO SO MANY RETAIL INVESTORS FOLLOW WOODFORD?

Woodford is among Britain’s most famous fund managers. The 59-year-old made his name over more than two decades at Invesco Perpetual, before leaving to set up Woodford Investment Management in 2014, based in the university city of Oxford.

He rose to prominence with his investment decision to avoid high-priced technology stocks, a move vindicated when the so-called ‘tech bubble’ burst and valuations fell sharply.

He repeated the feat during the 2008-2009 financial crisis by avoiding banks, instead preferring stocks such as tobacco companies, which made strong gains.

WHY DID WOODFORD SUSPEND THE FUND?

Trading in the fund was suspended because Woodford could not raise cash quickly enough to give back to clients who were trying to leave, including one of its larger investors, the pension scheme of Kent County Council in southern England.

Another contributing factor was a series of disappointing stock performances, culminating last week in a sharp fall in the share price of construction and services group Kier, in which Woodford’s fund has a significant stake.

By suspending the fund, Woodford has created room to sell some of his holdings in a more measured way that might help him secure a better price, thereby protecting the value of his investments for those clients who wish to remain in the fund.

Limiting his ability to act is the relatively large amount he has invested in private companies not listed on a major stock exchange, that are usually harder to offload quickly.

IS THIS AN ISOLATED ISSUE?

While any equity fund like Woodford’s can theoretically invest up to 10% of their assets in private companies in the hope of securing better returns, not many do. Of those that do, most invest far less than Woodford.

WHAT ARE REGULATORS DOING?

As people have sought to exit his fund, the relative proportion of unlisted firms within it has risen, making it harder to avoid breaching a European Union rule that no more than 10% of assets are held in unlisted or “illiquid” stocks.

One of the ways in which Woodford was able to keep below this cap was through some of the private companies in which he held stakes listing partially on the stock exchange in Guernsey.

The FCA, which authorizes Woodford, said it will look at how the fund applied this EU cap and whether the rules on applying the cap need toughening up.

“Simply listing an unquoted company overseas does not in itself make the stock more liquid,” FCA Chief Executive Andrew Bailey wrote in a column in the Financial Times.

Woodford’s “gating” of the fund has also triggered a spat between regulators in Britain and Guernsey, with the latter saying it was up to the FCA to investigate Woodford, and that it saw no reason to examine the Guernsey exchange he used.

WHY GUERNSEY?

By holding Guernsey-listed preference shares, Woodford’s Authorized Corporate Director is able to class them as listed rather than unlisted assets, for the purpose of the EU rules.

Over the last three years, four of the firms in which Woodford invested have issued preference shares on a stock exchange in Guernsey, although none have traded.

Woodford’s holdings that have Guernsey listed preference shares include a stake in medical data technology firm BenevolentAI, which was valued at nearly 200 million pounds at the end of April.

INVESTMENT PLATFORMS IN SPOTLIGHT

In Britain, many retail investors pick where to invest by using an online platform, the biggest of which is run by Bristol-based Hargreaves Lansdown.

Hargreaves, like other platforms, charges clients a fee each year based on how much money they invest. It uses its financial muscle to negotiate a reduced fee with managers like Woodford and then makes a list of funds it thinks are the best picks.

In the case of Woodford, Hargreaves has consistently championed his long-term performance track record and only removed his Equity Income Fund from its ‘Wealth 50’ list of top picks on the day it was suspended.

Reporting by Simon Jessop, Carolyn Cohn and Huw Jones, editing by Alexander Smith

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