"I Can't Remember Anything Quite Like This": $3.5 Billion Fund Drops Woodford In "Devastating Blow"

The shocking blocking of redemptions from Neil Woodford's, £3.7bn Woodford Equity Income Fund - after serial underperformance led to an investor exodus - is still sending shockwaves across the US asset management arena two days after it  was first reported.

"I can’t remember anything quite like this" said Peter Walls, veteran manager of the Unicorn Mastertrust fund, after trading in Woodford's fund was suspended. "I mean going back over decades really, there were quite a few funds that just didn’t pick up the telephone and suspended dealing in the dark days of the crash of '87 and black Monday and all that but this is quite big stuff," he said in an interview with CityWire.

As we reported on Monday, redemptions from Woodford's flagship fund were suspended yesterday to allow the manager "time to reposition the element of the fund's portfolio invested in unquoted and less liquid stocks, in to more liquid investments."

The problem is that the fund's extensive holdings of unquoted and illiquid stocks has presented a major challenge for Woodford in meeting redemption requests from investors; the subsequent news of the redemption halt has prompted even more selling as outside holders dumped the positions to frontrun the liquidating fund.

"I have to say if you look at some of the investments that went into [the] open-ended fund, you think well how on earth was that going to work?" said Walls.

Walls assessment was shared by wealth manager St James’s Place, which this morning terminated its £3.5bn relationship with Woodford in what the FT said was "a devastating blow to the veteran investor following the suspension of his UK Equity Income fund on Monday."

The announcement capped a disastrous week for Woodford, who was already reeling from the decision by Kent County Council to take back a £266m investment mandate and by Hargreaves Lansdown to drop the investor’s funds from its best buy list.

St James’s Place, a top-tier wealth manager and Woodford’s most important commercial relationship, said on Wednesday it had appointed Columbia Threadneedle Asset Management and RWC Partners to manage the three funds formerly managed by Mr Woodford. As the FT notes, Woodford was responsible for the UK High Income Unit Trust, UK Equity, Income Distribution and SJPI UK High Income funds for St James’s Place, accounting for a total £3.5bn — around a third of his total assets under management in May.

The company had grown increasingly nervous about Mr Woodford’s performance last month and had stepped up scrutiny of his funds amid customer requests for redemptions.

Separately, Woodford’s second open-ended fund - which will soon be gated too - has shrunk to its lowest level since launching, after investor flight picked up pace at Britain’s best-known portfolio manager afraid that that fund too would soon be gated. Income Focus, which Woodford launched to great fanfare with £500m of investor capital in 2017, has fallen to £473m this week on the back of investor redemptions and poor performance. It has shrunk 14 per cent since the start of May.

Meanwhile, in a video posted on Tuesday night, Woodford appealed to investors not to abandon the Income Focus fund. “It doesn’t have any exposure to illiquid or unquoted securities and consequently isn’t exposed to the same issues that the Woodford Equity Income fund is,” he said, although investors clearly no longer believe Woodford.

“And it’s positioned, I believe, for the economic and market environment that we’re likely to see over the medium and long term.”

“Considering all of the negative publicity surrounding Woodford, the fund [Income Focus] will probably, rightly or wrongly, be tarred with the same brush as the Equity Income fund,” said Justine Fearns, a manager at Chase de Vere, adding she expected outflows from Income Focus to continue.

The only question is when this next fund will itself be permanently gated, as will Woodford's career in the asset management industry.

Meanwhile, as we first said on Monday, what is most bizarre about this latest hedge fund fiasco is that the gating takes place with global markets still just shy of all time highs. One can only imagine what will happen to the rest of the hedge fund sector if the current swoon accelerates and drops another 5%, 10% or more, sending other hedge funds scrambling to liquidate their own holdings of the most crowded stocks. Those who succeed to sell first, they just may survive to fight another day.

But an even bigger concern is whether this gating by one of the UK's most iconic hedge funds sparks a redemption frenzy, first in England, and then, across the globe in what may soon become a rerun of the redemption panic that struck in December, resulting in the first S&P bear market since the financial crisis. Only this time, we doubt the market will recover just minutes after triggering the infamous -20% threshold.