The 3 fund meltdowns that mean Woodford is on his way OUT... S

It’s four months – and over £8m in pocketed fees – since the crisis began. Now Jeff Prestridge reveals

HOW t i me flies. Four months have passed since the ‘ money- making’ e mpi r e that is Woodford Investment Management began to crumble before our very eyes in the wake of its dramatic decision to suspend dealings in flagship fund Equity Income.

Money making, that is, for Neil Woodford, the once ‘star’ investment manager, who has creamed off nearly £8.2 million in fees from the ruins of Equity Income since it was suspended in June after it was unable to meet a wave of redemption requests from big investors.

Nothing but money worries (and lots of anger) for investors who will probably have to wait until December at the earliest before being given the opportunity to extract their cash from the UK-invested fund. Trapped, they can do little but watch the fund’s share price head inexorably downwards.

Sadly, Woodford- related woes extend beyond Equity Income. The share price of sister investment trust Woodford Patient Capital, invested in a toxic mix of unquoted companies, is in freefall, casting grave concerns over its future – while Income Focus’s shares are also sharply down. All not a pretty sight whichever way you look.

Although not all i nvestment experts agree, there is now a growing swell of opinion that believes Woodford Investment Management is living on borrowed time. Brian Dennehy, managing director of investment scrutineer Fund Expert, certainly does not mince his words.

On Friday, he told Wealth: ‘I am afraid to say that the Woodford brand is finished.

‘The most honest – and decent – thing Neil Woodford should now do is liquidate all three funds and return the cash to investors. He would get a lot of credit for doing this and then everyone could move on and start again with a blank piece of paper, hopefully much the wiser.’ Jason Hollands, a director of wealth manager Tilney, is not so damning. He points to brands such as Aberdeen Asset Management ( now part of i nvestment combine Aberdeen Standard Life) that survived crises – the split capital investment trust mis-selling scandal of the late 1990s – as evidence that damaged brands can be repaired. But he admits any rehabilitation of the Woodford brand could take ‘years’.

Here is the latest state of play on the three funds (not to be read by Woodford investors without ready access to a stiff drink).

MELTDOWN 1 : EQUITY INCOME

FUND Woodford Equity Income is a shadow of its former self. Assets under its wing have shrunk in value to below £3 billion – at one stage they topped £10 billion.

Although Woodford has used the fund’s suspension to move the portfolio into more liquid stocks – FTSE 350 companies – its performance remains dire. Figures from data provider Trustnet indicate t hat over t he past t hree months, locked-in investors have incurred paper losses of 15 per cent. Investors who bought into the fund at its start in June 2014 are sitting on losses of 19 per cent.

There is little on the horizon – other than the possibility of a strong bounce in the UK stock market triggered by a Brexit agreement – that suggests Woodford can turn around the fund’s fortunes.

Indeed, when the fund reopens, it is likely Woodford will be forced to sell key holdings to generate sufficient cash to meet an inevitable wave of redemptions – sales that will have to be made by Woodford irrespective of the prevailing market conditions and whether he wants to make them.

Patrick Connolly, a financial planner at Chase de Vere, says Woodford’s approach of investing in out-offavour UK domestic companies – including Taylor Wimpey and more recently Lloyds – ‘may come good in the end’. But on balance, he says his ‘inclination’ is for investors to exit Equity Income when it reopens.

MELTDOWN 2 : PATIENT CAPITAL

THIS investment trust, investing primarily in unquoted companies, is in a parlous state. Its share price is down 58 per cent since launch in 2015 and some of the valuations of key holdings (especially its biggest

position Rutherford Health) seem overinflated, according to experts.

The trust also has borrowings of more than £100 million that might need to be repaid as early as next January.

If so, this would require Woodford to conduct a fire-sale of quoted and unquoted holdings. A withering research note published in the last few days by investment trust specialists at Investec says the trust faces a ‘Herculean task’ in restoring shareholder confidence.

It also describes Woodford’s decision in July to sell 1.75 million of personal shares in the trust without first telling the board as ‘clumsily handled’. Others accuse the manager of ‘petulant arrogance’.

Investec says the trust is now a ‘highly speculative special situation’ and recommends shareholders cut their losses and sell. It is less clear cut on whether the trust’s board should replace Woodford with a new manager as it seems keen to do.

On Friday, Investec’s Alan Brierley told Wealth: ‘Woodford knows the trust’s underlying stocks and he has the added incentive of trying to salvage some of his reputation. But he must be kept on a tight leash by the board.’ Hollands is less sympathetic, saying: ‘It is hard to see a case for retaining the current manager. The greater challenge lies in finding an investment group willing to take on the task.’

Dennehy is most brutal of all. He believes there is a chance the trust could go bust if asset values continue to slide – and the t r ust’s borrowings need t o be repaid in a hurry.

He says: ‘ The most effective and straightforward solution is for the board to liquidate the fund and return cash to shareholders. The directors must stop prevaricating and act in the best interest of investors.’

MELTDOWN 3 INCOME FOCUS

INCOME Focus, a fund investing in UK-listed companies with the aim of delivering an attractive income, has performed terribly since launch in April 2017. Investors have suffered paper losses of 30 per cent. Unlike Equity Income, the fund’s doors have remained open – which has resulted in investors fleeing the decks. The fund’s size is now a fraction over £250 million – half the size it was when dealings in Equity Income were suspended.

Hollands says: ‘ Income Focus doesn’t hold unquoted companies like Equity Income and Patient Capital do. But its big positions are far from mainstream and heavily skewed towards house builders – the likes of Barratt, Bovis and Taylor Wimpey. The fund’s performance has been truly shocking and it is hard to see it attracting new money on the back of such a scorched record.’

Both Dennehy and Connolly believe Income Focus investors would be wise to sell their holdings. Says Dennehy: ‘Take the pain now and move on.’

Pain, sadly, is now a word synonymous with the troubled world of Woodford I nvestment Management. jeff.prestridge@mailonsunday.co.uk