Woodford's Indefinite Fund Freeze Leaves Investors Paying

(Bloomberg) -- Investors are trapped in Neil Woodford's frozen flagship fund until further notice, and he's still charging them thousands of pounds in fees.

The former star manager shocked the financial world a month ago by halting withdrawals after a run of poor performance. On Monday, the lockdown was extended with no timeline for lifting it. Meanwhile, Woodford is pulling in 65,000 pounds ($82,000) a day in management fees while he sells off assets to raise cash.

The redemption freeze has damaged Woodford's reputation, built up over decades by correctly calling major swings in technology, tobacco and other stocks. He has come under fire from politicians, regulators and long-time backers who have called on him to waive his management fee while the LF Woodford Equity Income Fund is frozen. He has refused, saying he's doing his job by gradually selling down the fund's stakes in smaller companies.

“Because the fund is suspended, there are no redemptions and the Woodford team is not forced to sell assets at distressed prices,” according to a statement from Woodford Investment Management. Progress has been made in selling some of the fund's unquoted holdings, and the firm is in the process of appointing a partner for further sales, the statement said.

On Tuesday, a representative for Woodford said in an emailed statement that the firm didn't intend to waive the fees because it needs to cover the cost of managing the fund.

Stake Sales

Woodford raised at least 300 million pounds in June by selling down some stakes, including those in BCA Marketplace, NewRiver REIT Plc and Oakley Capital Investments. On Monday, Raven Property Group agreed to a share buyback that would add another 26 million pounds to that total.

Andrew Bailey, head of the U.K. Financial Conduct Authority, is among those who have called on Woodford to waive his management fee during the suspension as a “sign to his investors.” At the same time, Bailey said in Parliament on June 25 that the rules allow Woodford to go on charging the fee, and that he “now has to manage the fund more than ever.”

An FCA spokeswoman declined to comment on the extension and fees beyond referring to Bailey's testimony to Parliament. The regulator doesn't plan to issue a statement on the matter on Tuesday, she said.

Suspending redemptions is a rare step for any fund, let alone one that offers daily liquidity. Natixis SA-backed H2O Asset Management has also been rocked by investors' concerns over illiquid assets, shedding billions of dollars in assets. But H2O Chief Executive Officer Bruno Crastes said the firm “never gated and we will never gate” its funds.

Formal Review

Reducing the fund's exposure to small companies may take some time because they typically aren't traded as frequently. In the worst-case scenario, it could take Woodford more than a year to liquidate half of the fund's portfolio, according to Morningstar.

The fund's administrator, Link Fund Solutions Ltd., said it will review the situation daily, and a formal review of the fund will be conducted every 28 days.

To some extent, Woodford's in the same boat as his clients. He said in a video on YouTube that all his “personal financial investments” are in his firm's funds. He didn't specify the size of his holdings, and a spokesman declined to provide a breakdown.

While Woodford's flagship was locked, his LF Woodford Income Focus Fund remained open -- and paid the price. Assets under management in the smaller fund plunged by 40% from May 31 to 296 million pounds as of June 28, according to data compiled by Bloomberg.

Woodford started out by investing in large, liquid stocks, but over time moved toward smaller companies, dramatically altering the profile of his fund. Nearly 97% of the assets in his flagship fund at the end of May were allocated to micro, small and mid-cap stocks, up from 40% in January 2016, according to Morningstar data. Some of the investments, including Sabina Estates and BenevolentAI, weren't listed on a major exchange.

Asked on the YouTube video why he had taken such large positions in unquoted, small companies, Woodford said he was “motivated to invest in undervalued assets, and size those positions with a view to the investment opportunity, the extent of the undervaluation.” In some cases, his positions grew because the stocks performed well, he said.

--With assistance from Lucca de Paoli.

To contact the reporter on this story: Suzy Waite in London at swaite8@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Patrick Henry, Paul Sillitoe

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