Woodford’s Frozen Fund Erodes Clients’ Cash Amid Asset Sell-Off

(Bloomberg) -- Neil Woodford's clients are seeing their wealth melt away as the stock picker sells holdings in a myriad of small and illiquid companies.

His flagship LF Woodford Equity Income Fund slumped 5.8% last month, missing its benchmark index by 9.5 percentage points, the biggest margin since the fund's inception five years ago, according to data compiled by Bloomberg. Investors have no option except to watch and wait because they're trapped in the fund, which was frozen by Woodford last month after a run of bad performance.

“News of the fund's suspension seems to have amplified some trends that have been hampering performance for some time,” a spokesman for Oxford-based Woodford Investment Management said in a statement.

The losses expose the perils of investing large sums of money in small- and micro-cap companies, a strategy that Woodford adopted in 2017 and that eventually led him to freeze the fund when he couldn't sell them quickly enough to meet redemption requests. While the strategy can be profitable, getting out of those holdings quickly can lead to steep losses. Woodford was especially vulnerable because his fund allowed investors daily access to their money.

Read more: Woodford's Indefinite Fund Freeze Leaves Investors Paying

“Indirectly, the suspension may have had an impact on the price of some assets within the portfolio, but it does not and cannot have any impact on their value,” the Woodford spokesman said. “We know that, broadly speaking, these companies are delivering solid progress and that, ultimately, this progress must be reflected in their share prices and, therefore, in the net asset value of the fund.”

Woodford raised at least 300 million pounds ($378 million) in June by selling down stakes in companies such as 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.

There is no timeline for when Woodford will allow his investors to take their money out. In the worst-case scenario, it could take him more than a year to liquidate half of the fund's portfolio, according to a Morningstar estimate.

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.

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

To contact the reporter on this story: Nishant Kumar in London at nkumar173@bloomberg.net

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

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