On Friday 23rd August, Link Fund Solutions Limited - the Authorised Corporate Director of the Woodford Equity Income Fund issued its monthly review and update. They confirmed that December 2019 remains a realistic time frame to complete the restructuring of the fund and it will remain suspended until then.
Woodford Investment Management are making progress with their efforts to reduce exposure to unquoted and illiquid stocks. Once complete the portfolio will continue to focus on undervalued companies, with the majority invested in FTSE 100 and FTSE 250 companies.
So far, over 80% of the proceeds from any disposals has been reinvested into FTSE 100 companies in the few areas of the market that Woodford believes offer value. Identifying situations where price and value diverge has been at the centre of his investment approach over his entire career.
Performance has continued to disappoint since the suspension, lagging significantly behind the benchmark FTSE All Share index. The suspension may have had an impact on the price of some of the fund’s assets in the short term. To protect the interests of investors, the company has decided to stop showing the top 10 holdings while the fund is suspended.
Over the past month, underperformance has been primarily attributable to share price falls in two of the fund’s larger holdings, Burford Capital and Industrial Heat. The price of Burford’s shares declined sharply after it came under fire in a report from a US-based investment firm. The company has since provided a comprehensive rebuttal of all the allegations.
Meanwhile, Link reviewed unquoted Industrial Heat as part of its six-monthly review process and determined that the company had not progressed at the pace anticipated. Last Friday, Link issued a valuation adjustment for Industrial Heat. Also last week, AIM-listed Eddie Stobart Logistics was suspended pending an accounting review.
Willis Owen comment
The situation is as we would have expected, given the current volatile market conditions. Finding buyers for smaller companies is not helped by the ongoing Brexit uncertainty, which is deterring investment into domestic UK shares.
Understandably, Woodford is no longer declaring his full portfolio on a monthly basis as such transparency was making it more difficult to obtain realistic prices. Competitors are using the situation as an opportunity to pick up a bargain. Furthermore, hedge funds have shorted stocks the fund holds, in the expectation of buying them back cheaper.
London Stock Exchange regulations require that Woodford Investment Management reports daily any sales that take listed holdings down by a full percentage point (for example, 10% to 9%). Holdings already below 3% do not need to be declared. This gives us some idea of the progress being made.
The task ahead for Woodford is not an easy one, particularly given the significant holdings in less liquid and unquoted stocks that still need to be sold. The delisting of some companies previously listed on the International Stock Exchange in Guernsey has increased the proportion of these unquoted holdings towards 18%, compared with the regulatory maximum of 10%. We understand external specialists have been engaged to assist with placing these holdings with prospective buyers.
We will continue to keep you informed of the progress being made and will update you when there any significant developments.
Trading in the LF Woodford Income Focus fund and Woodford Patient Capital Trust remains unaffected by this suspension.
Important Information: Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment.
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