The Liquidity Lessons of Neil Woodford
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What lessons in liquidity can the implosion of the Neil Woodford investment funds teach investors and financial regulators?
In the first of a two-part blog, MATTHEW FEARGRIEVE describes the serious mismanagement that led to the liquidation of The Woodford Equity Income Fund, and explains the fund’s liquidity structure.
The Woodford Equity Income Fund (“WEIF”) was placed into liquidation in October 2019, after having suspended redemptions in June. The fund had been managed since its 2014 inception by Neil Woodford, an investment manager widely credited with “star” status following a successful career in the City. At its peak, WEIF had around £10 billion of assets under management.
In this piece we are going to focus on the liquidity management (and mismanagement) issues arsing out of what we now know about what WEIF was invested in, but you can read more about the whole implosion of WEIF and its aftermath in our previous blog here:
Portfolio illiquidity and asset sell-off
WEIF was structured as an Undertaking for the Collective Investment in Transferable Securities (UCITS), a retail-friendly, regulated European investment product that is open-ended and strictly required by the regulatory regime to permit investors daily liquidity. Note those two words: daily liquidity. They would come to haunt Woodford and his investors. The regulatory regime permits managers of UCITs to place long-only bets on liquid stocks. But Woodford’s investors were soon in for a surprise. Within two years’ of WEIF’s launch in 2014, it was apparent that the fund’s portfolio comprised substantial allocations to mid-cap stocks with high yields, small caps and significant positions in unlisted — illiquid — companies. When these companies, in which WEIF had questionably large positions, issued profit warnings, his investors started asking questions. Their confidence in him started to wane; and they began to submit requests to redeem their holdings in the fund.
