Neil Woodford’s Bets on Unlisted Firms Help Push Fund to Brink

(Bloomberg) -- Neil Woodford’s bad bets prompted an investor exodus from his flagship fund, but it was the former star manager’s holdings of hard-to-sell stakes that pushed him to suspend redemptions.

With clients demanding their money back, Woodford locked up shares in his flagship LF Woodford Equity Income Fund until further notice. The freeze buys him time to offload “unquoted and less liquid stocks” and shift into more readily traded investments, according to a statement on the firm’s website.

Unusually for a mutual fund, BenevolentAI Ltd., an unlisted biotechnology company, and Oxford Nanopore Technologies Ltd., which develops technology for molecular detection and analysis, accounted for about 7% of assets at the end of April. And as the fund’s publicly traded investments lost value, the share of the portfolio made up by stakes in non-public companies went up, compounding its liquidity woes.

“Events such as this are rare, but it is a reminder to all of the risks that come with investing in illiquid assets while offering daily liquidity to investors,” said Ryan Hughes, head of active portfolios at AJ Bell Plc. “This never appears to be a problem when money is flooding in, but when sentiment turns it can come back to bite investors badly -- as has happened here.”

Neil Woodford Criticized by Pension Fund for Redemption Freeze

The freeze on withdrawals by Woodford reverberated across markets Wednesday, sending shares of Hargreaves Lansdown Plc, a U.K. investment platform, down by as much as 7% amid concern of an investor backlash. Hargreaves removed the main Woodford fund, and another that his firm oversees, from its Wealth 50 list of favorites. The Woodford Patient Capital Trust Plc, a closed-end listed fund, plunged as much as 20%, the most on record.

The suspension marked a dramatic turn for Woodford, 59, who had built his reputation into a cult following by calling major swings in technology, tobacco and other stocks over decades at Invesco Perpetual, and once managed the U.K.’s largest equity fund. He launched his own vehicle in 2014 and got it off to a strong start before stumbling.

Redemption Requests

Investments in unlisted securities are unusual for mutual funds. While they offer the allure of potentially higher returns, they also limit a fund manager’s ability to meet daily redemption requests. The stake in BenevolentAI accounts for about 4.5% of the assets in Woodford’s main fund; Oxford Nanopore comes in at 2.6%, according to the firm’s website.

Woodford is “in the process of reducing these illiquid securities to zero,” said Roland Cross, an external spokesman for the money manager. “He’s repositioning the portfolio to make it more plain vanilla and this suspension of redemptions allows him to do that. We anticipate there will be more redemptions in the future, and he’s getting the fund in a position in the future to meet those in an orderly way to protect the existing investors.”

The problem of illiquid investments keeps coming back to trouble investors. Swiss asset manager GAM Holding AG had such holdings in its bond funds and couldn’t meet investor redemption requests after it suspended bond trader Tim Haywood. The firm locked up more than $7 billion across nine funds last summer.

Property Assets

When the U.K. voted in 2016 to leave the European Union, the country’s largest real estate funds froze almost 9.1 billion pounds ($11.5 billion) of assets as investors rushed to get their money out. M&G Investments, Aviva Investors and Standard Life Investments all stopped withdrawals from funds devoted to illiquid property assets.

Earlier this year, Woodford made an effort to calm investors who were nervous about his holdings in early-stage unlisted companies. He wrote in an investor letter that exposure to unquoted companies would decline to less than 10% this year and would eventually reach zero.

“My colleagues and I need to do more to educate and inform our investors about what these businesses do, why we own them and why we think they will deliver exceptional returns and why we think they are so undervalued,” he said at the time.

©2019 Bloomberg L.P.

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