Woodford Equity Income Fund – how the portfolio is changing

Manager is reshaping the portfolio towards more easily-traded stocks.

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  1. Rob Morgan

It’s been just over three months since Woodford Equity Income, Neil Woodford’s flagship fund, suspended dealing owing to very significant investor withdrawal requests. Since that time, Mr Woodford has been working to reshape the portfolio towards more easily-traded FTSE 100 and FTSE 250 stocks and away from the unquoted and smaller companies that became a progressively larger part of the portfolio caused the withdrawal bottleneck.

The intention remains to reopen the fund with a liquid portfolio of the manager’s best ideas in larger stocks, in order that investors can either choose to sell or keep the fund.

Some progress has been made in this regard. According to Link Asset Services (the fund’s Authorised Corporate Director or ACD) a December re-opening remains a “realistic timeframe”. However, it is not guaranteed and a further delay is possible. As I mentioned in my previous article on the fund, the process of selling unlisted investments to interested parties can be lengthy as any buyer will wish to undertake their own due diligence.

Repositioning

Having previously offered full transparency, during the period of suspension Mr Woodford is keeping the make-up of the portfolio under wraps. His holdings in smaller, listed companies that he is also planning to offload could be targeted by other market participants aiming to profit from second guessing his actions. The lack of detail, while regrettable in terms of providing information to fund holders, is likely a necessity in terms of maximising value during a period where he has to sell certain positions.

One company that Mr Woodford has exited from is Autolus, a biotech firm specialising in cancer treatment. Other smaller listed companies offloaded include Russian warehouse investor Raven and technology investor Mercia.

Proceeds of sales are being put to work mainly in FTSE 100 stocks, and the fund’s most recent half-year report (which covers the period until the end of June and hence the first few weeks of suspension) shows significant purchases in International Consolidated Airlines, BT Group and British American Tobacco.

Recent performance

The fund’s performance during suspension has been disappointing. Having been fairly resilient during June and July, it fell around 10% in August against a drop in the FTSE All Share Index by around 4%.

Partly this reflects the effect of the suspension and the circumstances around it, which may have had an impact on the price of some of the fund’s assets. However, it is primarily attributed to the share price decline of two of the fund’s larger holdings, Burford Capital and Industrial Heat.

Shares in Burford, which provides litigation financing, declined sharply after it came under fire in a report from a US-based investment firm renowned for short selling – or profiting from falling share prices. The company has since provided a comprehensive rebuttal of all the allegations but shares have only partly recovered.

Meanwhile, a regular review of unquoted holding Industrial Heat determined that, "progress had not been at the pace previously anticipated" and the ACD, Link, issued a valuation adjustment, writing it down by around 40%.

We will continue to monitor the fund and keep investors updated regarding further developments.

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