In an email communication sent to investors by Woodford Investment Management, which I received today, the firm declared it is continuing the suspension of its Equity Income fund until December.
If you are invested in the fund, I can appreciate your frustration. Could there be anything worse than losing control of your investments and not having the ability to back your own judgement with buy and sell decisions?
Sound reasons for the suspension
But the reasons behind the extended suspension strike me as sound enough. Woodford needs more time to get the fund out of illiquid, private companies and smaller-cap listed firms. If that kind of selling were to be done in a hurry, the fund could end up being a distressed seller taking prices that are too low and not representative of the underlying value.
So Woodford has its investors’ interests in mind. Fair enough. But what about the future when the fund does eventually reopen for investor dealing, and we can move in and out of the fund again at will?
According to today’s update, the fund will look much more liquid because the “majority” of it will be invested in FTSE 100 and FTSE 250 companies. Not just any old big stock-market-listed companies, but “undervalued” ones.
If you’ve been following Neil Woodford for a while, you’ll recognise that trading shares based on a judgement about valuation has been key to his strategy all along. For a long time, it worked. Then it appeared to stop working, which was part of the reason the fund is in trouble now.
A gloomy prediction about world economies
Indeed, Neil Woodford said in the communication his strategy “has not delivered the returns we had anticipated over the past couple of years.” But he also said the ongoing investing strategy is based on “a belief that the global economic environment is not as robust as equity markets are implying.” He argues that growth in the US is stalling and “parts of Europe barely growing at all,” alongside problems in emerging market economies.
Before the suspension of the fund, Woodford was focusing on ‘undervalued’ UK-facing stocks rather than on those trading all over the world. But if there is global economic weakness on the way, I can’t help thinking that the UK economy will take a plunge too. And if UK-facing stocks sport low-looking valuations, perhaps that’s because the stock market anticipates trouble ahead. If that’s the case, I worry that a low valuation may not protect a stock from plunging if the earnings of the underlying business take a dive.
Where I’d invest instead
But that’s the thing with managed funds: the fund manager may run a different strategy to the one you might adopt yourself. So I’d get around the problem by investing in low-cost, passive index tracker funds or by picking my own individual shareholdings.
If the Woodford Equity Income fund is primarily going to be invested in FTSE 100 and FTSE 250 shares, I reckon trackers following those indices will likely come close to its ongoing performance. Especially if you consider the differences in fees between expensive managed funds and cheaper passive funds. I also think it’s less likely that a passive fund will ever go into a state of suspension and pull the shutters down on its investors.
