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A quick thing before I get started today – I’m going to be hosting a panel at ETF Stream’s Big Tech morning event on Wednesday 12 June (ie, this Wednesday coming). MoneyWeek regular David Stevenson will be there too.
Tickets are free but limited, so if you fancy coming along – and it does look like it’ll be a really interesting morning, particularly for any of you who are invested in FAANGs and the like – then register here now.
Now on to this morning’s topic – an update on the ongoing saga of Neil Woodford’s fall from grace.
Woodford isn’t doing himself any favours
At the start of this week, Neil Woodford gated his fund, Woodford Equity Income. We looked at the reasons for this earlier in the week, and clearly it’s the biggest story in this week’s issue.
Here’s the cover, by the way. Subscribe here if you don’t already – I mean, look at what you’re missing! You even get your first six issues free!
Anyway, so what’s happened since then?
In short, Woodford has lost even more customers. He used to run funds for wealth manager St James’s Place (to be clear, these were income funds which he managed separately – they weren’t the Woodford ones). That’s no longer the case – they pulled his “mandate”, and with it, more than £3.5bn of money.
He also lost his final big mandate – Omnis has dumped his company as the manager of its Omnis Income & Growth fund. That’s another £330m away.
None of these funds were directly threatened by the same issues as Woodford’s Equity Income fund. To be clear, the problem there – as we and many others have now been over several times – was liquidity.
Too many people wanted their money back at once, and unfortunately for him (and them), Woodford couldn’t sell the holdings in his fund fast enough without devastating the price of those holdings, because the stocks were either unlisted, or too small for the amount of money that he held in them. Hence the doors being locked.
And this issue was specific to the Equity Income fund. His other open-ended fund, the Income Focus fund, is in more liquid stuff. Meanwhile the Patient Capital Trust is an investment trust, and thus much more suitable for owning illiquid assets.
But what this mass abandonment shows is this. One, no one wants to be associated with a toxic brand. Two, it makes the Woodford business itself less and less viable.
Even Hargreaves Lansdown, which has been the most vocal backer of Woodford, has waived its platform fee on the fund. The broker has also told Woodford he should follow suit.
Yet incredibly – at least as of the time of writing, it wouldn’t surprise me if this changes later today – Woodford has apparently refused to waive the 0.75% annual management fee (depending on which broker you bought through) on the fund, even while the money is locked away behind the gate.
Putting it bluntly, that’s a hell of a brass neck. It also hints at a complete tone deafness to the existential crisis his business is facing.
What happens to Woodford’s holdings now?
Merryn and I discuss the background to all of this in more detail in the latest MoneyWeek podcast.
But what happens now? At the end of the day, Woodford needs to build up enough cash in his fund to meet redemptions. And given the way he’s behaving, and the way the industry is stepping sharply away, that looks like it needs to be an awful lot of cash.
So he’s going to have to get rid of a lot of what he owns in that fund. And not just the really troublesome unquoted stuff. Woodford’s other liquidity problem – as alluded to above – is that even reasonably widely-traded stuff can be hard to get rid of if you own a big enough chunk of it.
Woodford argues that he’s not a forced seller. But that’s a stretch. He might not have a specific deadline, but he’s definitely got to sell this stuff. And every potential buyer out there knows it.
His Patient Capital Trust (LSE: WPCT) is the obvious place to start. But any deals done with the trust are going to be very closely watched indeed. So if it does buy any of Woodford’s companies, then it’ll have to be quite obvious that a good deal is being done – and a good deal for WPCT means a not-so-good deal for the Equity Income fund.
This all points to there being an unusual amount of selling pressure on the stocks he owns big chunks in. Could that mean we see buying opportunities in some of them? Possibly.
I’ve had a glance through Woodford’s portfolio. I haven’t analysed the individual stocks, so these are not recommendations, just observations. If these stocks are on your watchlist, or in sectors you are keen on, then it’s probably worth your time at least running the slide rule over them.
And if you are an individual stock picker, take the time to download the whole portfolio – one thing I can say for Woodford is that he was dedicated to the whole transparency idea, which is a plus point. (You have to register with the site, but that’s simple and free).
The top ten for Equity Income Focus contains three house builders – Barratt, Taylor Wimpey and Countryside Properties. I’m not a fan of the sector, but maybe you are.
There’s Burford Capital, the litigation funding specialist.
There’s troubled subprime lender Provident Financial – that has actually shot up because a hostile takeover from rival Non-Standard Finance has fallen through. I haven’t kept my eye on Provident since it decided to destroy its own business model a few years ago – and it’s a mucky old sector if you don’t know what you’re doing.
There’s a couple of US-listed biotechs – Autolus and Theravance. There are a couple of unlisted stocks – Benevolent AI and Oxford Nanopore. And the other in the top ten is IP Group – which is basically a fund that invests in university spin-offs.
As I said – if any of them are on your radar, it might be worth putting them to the top of your investigation list.
What about Patient Capital itself? On the one hand, it has sold off very hard. Every fund has its price. And this one may be sitting on some very decent companies for all we know.
On the other hand, there’s going to be selling pressure on at least some of those companies. So their current valuation may not reflect their actual valuation.
On top of that, it’s hard to have a lot of confidence on Woodford’s flare for picking unlisted stuff. So ultimately, you’d need to see a decent discount on this trust before you considered buying it. So far the discount is only 25%.
That’s not big enough for me – yet.