The Neil Woodford saga continues

Unless you’ve been living under a rock this week, you’ll have read the extensive coverage of Neil Woodford’s decision to suspend trading in one of his funds. My understanding is that this makes it temporarily impossible for an investor to buy or sell units in the fund, or to transfer units they already own between providers. This is a pretty dramatic measure, but one which Mr Woodford has deemed necessary given some dramatic outflows of capital over the last few months (including about £250m from a UK council).

I’ve written previously about my opinion of ‘investors’ piling into funds run by Neil Woodford as well as my opinion that they would also panic when returns failed to keep up their previously exceptional levels. Sure enough, this is exactly what has happened and now Neil has suspended the fund. Anyone who got out before the suspension is likely to have made an overall loss on their investment given his performance over the last few years and anyone left in is probably gnashing their teeth in frustration (or panicking that they’re on the investment equivalent of the Titanic but locked below deck).

I’m not an investor in any funds run by Neil, but if I were, I think I’d be a bit more sanguine about this situation. As covered in my previous article, a great number of the positions held in the fund are highly illiquid and long-term plays. Panicking investors requesting their money back have forced Neil to sell out of positions to repay them but the sheer volume and high publicity of the coverage regarding this have caused prices to fall further than they might have done in anticipation of large sell orders coming through from the Woodford funds.

Of course, this doesn’t actually make any statement about the businesses themselves – it is simply a reflection of supply and demand where artificially inflated supply from Neil selling has outweighed the demand from the wider market. It doesn’t mean the companies are failing, or that Neil’s original investment thesis is incorrect – it simply means that retail investors are panicking and stampeding out of the fund. If Neil attempted to honour those redemptions, market prices in his liquid positions would decline further and he would be forced to sell his illiquid positions at pennies in the pound to pay out cash to his investors.

This sorry saga simply reinforces my opinion that holding a short-term ‘trading’ mentality in the stock market is a very dangerous and ill-informed thing. I hold my positions for as long as possible – provided the companies themselves continue to grow revenues, generate (and pay out) profits, and don’t undertake activities which I consider to be incongruous with my values.

Too many retail investors instead treat the stock market and their holdings as bank accounts with a slightly higher rate of rate. If they suffer a paper loss, they panic. They hop from one ‘great opportunity’ to ‘the next hot thing’. They react to price rather than value. In short, they do everything other than try to consistently identify great companies and buy them at fair prices, and so when a fund (or company) fails to meet expectations over the short-term, they immediately try to move on.

The fact the Woodford funds held such a large proportion of highly illiquid (often totally unquoted) stock positions was perhaps not the smartest decision for him in hindsight. Unlike shares traded daily on the main market, these private start-ups have no daily trading market. Current values are harder to ascertain as finding a buyer is a more difficult than simply listing a sell order through a broker. If you find a buyer for the position it’s often harder to come to terms – the buyer might wonder why the company is being sold and if they conclude that it is because the company has fundamental problems, they might decline to buy all together. Because the Woodford funds let investors buy and sell their holdings of the fund whenever they pleased, this led to a potential demand incongruence where more investors wanted to buy than sell the fund. In this event, Woodford would have to sell part of his holdings to ‘cash out’ an investor as there was no market participant willing to take the holdings.

And what might make investors panic? How about the following picks;

Kier Group-84%
Provident Financial-79%
Allied Minds-74%

Add Purple Bricks, the online estate agency in which Neil saw his initial purchase price quadruple, before collapsing back to almost exactly where he started, and it becomes easy to see why many are questioning his investing rationale and methodology.

Despite all of this, I’m actually a big fan of the way Neil updates investors and his opinions and outlook on the market. He’s one of the most transparent and relatable managers I can name, charges reasonable fees, and has a great track record over 30 years. I think he’s been a great force for improving investor relations and I think the UK industry will lose a very positive influence if he decides to close up shop.

Ultimately, this is an ‘investment’ I’m glad I avoided. Although I have held (and still do hold) a number of private placements I generally prefer the majority of my holdings to have some level of liquidity. I hesitate to make a call about what happens next for Neil and his funds, but whatever it is, I’ll be watching with interest.

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