It’s no secret that portfolio manager Neil Woodford has been going through a challenging period recently. The performance of his Equity Income fund has been absolutely diabolical and it has been widely reported that investors have been pulling their money out of the fund at a rapid rate.
However, in a dramatic new twist, Woodford Investment Management announced yesterday that it has taken the drastic move of suspending dealing in shares in the fund with immediate effect. So, let’s take a closer look at what this means for investors.
Investors’ money is locked up
While share dealing in the Woodford Equity Income fund is suspended, no requests to redeem, purchase or transfer shares in the fund will be accepted. This means that investors will be unable to access their money. So for example, if you’re invested in the Equity Income fund and want to take some money out of the fund or adjust your portfolio, that’s simply not possible at the moment.
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Why has this happened?
The reason that share dealing has been suspended is that the astronomical amount of money that was flowing out the fund (around £560m in the last four weeks) was causing huge problems for Woodford and making his job of managing money far more difficult as he was forced to sell stocks to meet redemptions. A recent £250m redemption request from Kent County Council appears to be the straw that broke the camel’s back. Woodford Investment Management says that the suspension is intended to “protect” investors by giving the fund manager time to reposition the fund into more liquid holdings.
In terms of the duration of the suspension, Hargreaves Lansdown is saying that it could be 28 days, although Woodford’s website says: “We will keep all investors appropriately informed about the suspension, including its likely duration.”
What to do now
Is there anything that investors can do now? Unfortunately, no there isn’t. Patience is required.
I’m sure that at some stage in the not-too-distant future, the suspension will be lifted and investors will have access to their money again. However, for now, if you have money in Woodford’s Equity Income fund it’s stuck there.
Undoubtedly, many investors will be angry about this and few will have confidence in the portfolio manager going forward.
What can we learn from this?
As always with investing, however, there are a few lessons that investors can take away from this debacle.
The first is that when investing in funds, it’s essential to diversify. It may seem as though a fund already offers diversification because it contains a large number of stocks, however, fund managers can underperform at times and occasionally run into trouble, so it’s always sensible to spread your capital out over several different managers.
Second, this suspension also highlights the risk of investing in funds altogether. They can be an excellent way of gaining exposure to the stock market and they are suitable for many investors, however, they do have their drawbacks. This is an example of what can happen when things go wrong. If you invest in individual stocks, you’re not going to be faced with this predicament.
