PRUDENT INVESTOR’S VIEW

BE angry. Be very angry! But don’t panic.

neil Woodford may have temporarily slammed the doors on his Equity Income and Income Focus Funds, preventing investors from gaining access to their savings, but for most, this will hopefully prove to be an inconvenience rather than a disaster.

This isn’t a run on a bank. This isn’t another northern rock or Bradford & Bingley where shares became valueless. your money is still invested in the shares of companies held by the two funds. It is the value of those shares that determines whether you make or lose money.

Woodford Equity Income shares were yesterday valued at around £1, so if you invested at launch — five years ago — at this stage you haven’t lost anything, though you won’t have made anything either.

I sold in two batches last year at £1.18 in February and £1.22 in June — the shares have fallen 18 pc since last summer. a further fall is likely. Shares in several investments, especially smaller ones, slumped early yesterday, partly on fears of his weak position if he has to sell.

Pharmaceutical company Circassia lost more than 8 pc, innovation technology firm allied Minds lost 6 pc and mattress maker Eve Sleep lost 7 pc.

The fund seems likely to be locked for a minimum of 28 days until a review takes place, but I suspect it could be closed for longer because there could be a lot of restructuring.

This is likely to mean selling some of the unquoted shares, which can be difficult to trade, and replacing them with those that are more easily traded.

Ironically, during a period of rough performance for Woodford Equity Income, some of the unquoted shares were among the better performers.

The result was that they were making up an ever-greater proportion of the fund.

This put pressure on when people wanted to cash in because instead of selling these, Woodford was forced to offload more readily tradeable shares such as Lloyds Banking group.

The temporary closure of this fund raises some fundamental questions for the fund industry, not least for Hargreaves Lansdown, a major backer even to the extent of including it in a revamped Wealth 50 list of favourite funds earlier this year.

Hargreaves has now removed both funds from the Wealth 50, and it is fair to question whether part of its reason for sticking with the fund was to prevent panic selling.

Mark Dampier, Hargreaves Lansdown’s 62-year- old research director, has admitted to having sleepless nights over the fund.

‘We have had some long, hard conversations with him over the needs of our clients and how we think he should restructure the fund.

‘Woodford is a respected fund manager with a great track record, and this fund was a top performer, but he has been through a very tough period over the past two years, partly because of Brexit.

‘He has had two bad periods before but this has lasted longer than either of those.’

It is not just direct investors who hold the fund.

Hargreaves Lansdown holds around £410 million of Woodford Equity Income in its own Multi Manager Income & growth Fund; this fund is worth just over £2.9 billion, 14 pc of which is in the Woodford fund.

The dragging effect has contributed to a loss of almost 9 pc over the past year, and underperformance against similar funds since 2016, according to figures published by analyst Morningstar.

So why has it all gone so wrong? Here’s a clue.

We asked adviser aJ Bell to provide a breakdown comparison of Woodford Equity Income at the end of March this year and his former fund, Invesco High Income, when he was managing it in June 2013.

at Invesco, almost 80 pc of assets were in large, or very large, companies, whereas Woodford Equity Income held just 4.6 pc in such companies.

at Invesco, 5.5 pc was in small or micro companies compared with 72 pc at Woodford Equity Income.

The biggest holdings at Invesco were international concerns such as glaxoSmithKline, astraZeneca and BaT — and these were the type of shares he initially held at Woodford Equity Income when the fund got off to a flying start.

However, the biggest holdings are now the likes of UK housebuilders, such as Barratt Developments and Taylor Wimpey, and fringe lender Provident Capital.

Woodford took £ 10 billion of investors’ money and placed it on a positive Brexit. The wheel spun and investors lost.

In the past couple of months the imbalance towards smaller holdings has been addressed to some extent partly by swapping some investments into his Woodford Patient Capital Investment Trust.

During the closure period it will no doubt be addressed further.

The irony is that this enforced closure may force Woodford to go back to what he did best, investing in good value companies that pay a regular income over the long-term, so while things look bleak now, they may look brighter in a few months.