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How to… Explain fund suspensions to clients

The Woodford fund suspension has raised many questions about closing funds

Financial headlines have been dominated of late by one story: the suspension of Neil Woodford’s flagship fund. The Woodford Equity Income fund announced on 3 June that it was to suspend all trading immediately due to the number of outflows it had seen in recent months.

Redemptions were caused because of a performance drop – the fund saw a fall of 19.22 per cent in the single year to the day of suspension.

Clients and investors understandably may be worried given that the closing of funds is not a regular occurrence. But it does happen, and undoubtedly it will befall other funds in future.

Many advisers and platforms have chosen to use the Woodford fund news as a cue to contact clients, to explain the situation and how it may affect investments.

Chris Gilchrist: Woodford’s management now under the microscope

So, what actually happened with Woodford?

It has been a firm favourite with investors since launch, but in recent months the Woodford fund has struggled. A note from AJ Bell Youinvest explains: “The more investors took out their money, the harder it became for the fund to sell assets to generate money for other investors wanting to withdraw. This is because it meant having to offload hard-to-sell or illiquid positions.”

The goal of the fund suspension is to enable the manager to make deals and so facilitate a slower and more orderly sale process.

Has this happened before?

Yes. One example in recent history comes from the period after the EU referendum three years ago. Property funds were hit by a massive wave of redemptions following the vote for Brexit. Investors flocked to take money out of property funds owing to concerns the property market would be badly affected in the wake of the vote.

Due to liquidity issues typically surrounding property funds, many were forced to suspend trading. A major problem for them was the increase in cash in portfolios, meaning minimal returns in a rising market.

The chart shows examples of two funds across five years, noting when the Brexit vote happened. The performance of the funds and sector have since recovered – but slowly.

Do I have exposure through multi-manager and multi-asset funds?

Quite possibly. The Woodford fund was very popular with investors and fund selectors until recently having been on many ‘buy’ lists, so it may be owned in many funds.

Hargreaves Lansdown – a known supporter of Woodford – released a client note to provide more clarity and context to its investors. The Woodford Equity Income fund is 6.2 per cent of the total value of the HL Multi-Manager funds and is held in six portfolios. The Balanced Managed, Special Situations, Income & Growth, Equity & Bond, UK Growth and Strategic Assets have varying weightings of the fund but range from 2.6 per cent to 12.4 per cent. This means that they are completely unable to trade in the Woodford fund until the suspension has been lifted.

The funds operate as normal, but the managers believe the portfolio is well diversified enough and has daily liquidity.

Hargreaves Lansdown freezes platform fees over Woodford fund fallout

What happens with fees?

Whether or not advisers and investors agree, the fund fees remain in place regardless of people being unable to take money out of funds.

MP and chair of the Treasury Select Committee Nicky Morgan has put pressure on Woodford, saying that other funds have suspended fees after soft closing funds and he should too. FCA chief executive Andrew Bailey agrees, stating on the BBC Radio 4 Today programme: “He should consider very seriously his position.”

Could this happen again?

It is likely. All open-ended funds are subject to large flows in and out at any time in any market condition.

What happens next?

We wait and see. There is no set timeline for how long the fund will remain suspended. It could be reopened as early as the end of the month, or in a few months’ time.
At the beginning of June the regulator said: “Where the FCA believes there are circumstances suggesting serious misconduct or non-compliance with the rules, it may open an investigation.”

Last week the FCA launched an investigation into the suspension of the Woodford fund.

In response to a letter from Morgan seeking more information regarding the issues faced by the fund, the regulator’s Bailey replied to confirm it had launched a formal investigation but could not “comment any further”.

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Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. Julian Stevens 4th July 2019 at 9:10 am

    I still maintain that comparing Property funds with those based primarily on equities (and/or Bonds) is inappropriate. The very nature of the former is such that, from time to time, the managers will (not just may) suspend redemptions to protect those remaining from the effects of forced fire sales to meet spikes in demand. Investors (if they bother to read the prospectus and are properly advised) should be aware of that before they go in.

    The reason for the suspension of Woodford’s fund is different, in that it’s basically to prevent total melt-down, though he’s not going to be able to put off lifting it indefinitely and, when he finally does, I think that melt-down is exactly what will happen.

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