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Woodford Equity Income Fund Suspends Trading

Closed-end funds and OEICs
Spet0789
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Re: Woodford Equity Income Fund Suspends Trading

#227451

Postby Spet0789 » June 6th, 2019, 12:12 pm

SalvorHardin wrote:
Nimrod103 wrote:Good article by MSW in the FT.
Google with the heading 'Neil Woodford broke the ground rules — now investors will pay the price', to get the article for free. Shame she didn't write it 3 months ago.

In case people can't get the FT article it can be found at the link below:

https://www.businesstelegraph.co.uk/nei ... the-price/

What we're seeing is the open-ended fund equivalent of a bank run. There's quite a bit of panic out there with a lot of investors wishing to sell immediately, leading to a level of redemptions that is vastly greater than the fund would normally expect. The situation is worsened by many of the portfolio's holdings being in illiquid and unquoted shares, so in order to meet the redemptions the managers have to sell their more liquid shares (which may be the ones they'd prefer to keep).

This is a great advertisment for investment trusts over open-ended funds. In similar circumstances the investment trust's share price would fall without the need for forced sales.


Case study right now being FEET from Fundsmith. Invested in less-liquid EM shares, moved to a 6% discount this week. No drama.

For me an opportunity to add, although I am waiting, with all other holders, for some decent performance!

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Re: Woodford Equity Income Fund Suspends Trading

#227468

Postby jackdaww » June 6th, 2019, 12:54 pm

simoan wrote:
SalvorHardin wrote:This is a great advertisment for investment trusts over open-ended funds. In similar circumstances the investment trust's share price would fall without the need for forced sales.

Of course, this does not only apply to OEICs. The same also applies to some ETFs where there is a veneer of liquidity in the ETF instrument that is not mirrored by the underlying assets. I think some ETF holders are going to get a nasty shock at some point in the future.

All the best, Si


===============================

most of my money is in mainstream shares , but i do now have holdings in investment trusts --

SMT
MYI
HFEL
MRCH
CTY .

i wonder if any of these , or other popular IT's can hold unquoted stuff , or be at risk from dodgy managers?.

:?:

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Re: Woodford Equity Income Fund Suspends Trading

#227471

Postby terminal7 » June 6th, 2019, 1:01 pm

Just read on Bloomberg that the unlisted bio company BenevolentAI accounted for 4.5% of assets fund and Oxford Nanapore 2.6%. Shares in both cos. would appear to be fairly illiquid. There were (remain) big punts.

T7

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Re: Woodford Equity Income Fund Suspends Trading

#227472

Postby Alaric » June 6th, 2019, 1:02 pm

jackdaww wrote:
i wonder if any of these , or other popular IT's can hold unquoted stuff , or be at risk from dodgy managers?.

:?:


Generally speaking all ITs can hold unquoted stuff, you need to look at their stated mandate to find out what they do in practice. They can also borrow to invest, which OEICs cannot. As for being at risk from dodgy managers, the risks are just the same as for OIECs.

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Re: Woodford Equity Income Fund Suspends Trading

#227473

Postby Dod101 » June 6th, 2019, 1:11 pm

jackdaww wrote:[
most of my money is in mainstream shares , but i do now have holdings in investment trusts --

SMT
MYI
HFEL
MRCH
CTY .

i wonder if any of these , or other popular IT's can hold unquoted stuff , or be at risk from dodgy managers?.:


SMT for instance does have a lot of unquoted stuff but no investment trust will be faced with the same problems that Woodford has because ITs are not subject to redemptions, which means selling off bits of the underlying fund and handing it back to the investor. Being closed end funds, all that happens with an IT is that you sell the shares you own leaving the underlying investments undisturbed. Furthermore SMT's manager is Baillie Gifford, a private unlimited partnership, quite unlike say HL. Its partners are on the line for mistakes so you can be pretty sure that they will be very careful. I think in that regard Baillie Gifford are almost unique these days and are just about the diametric opposite of HL.

These are all well known and long established trusts and are unlikely to have 'dodgy' managers, not to say that they cannot make mistakes. The other thing about ITs is that they have an independent Board of Directors to oversee the manager and that should provide an additional layer of security. No investment is bullet proof though.

Dod

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Re: Woodford Equity Income Fund Suspends Trading

#227481

Postby monabri » June 6th, 2019, 1:33 pm

From the CTY annual report, page 13.

https://www.janushenderson.com/ukpi/Fund/169/documents


"The portion of the portfolio invested in large UK listed companies
increased over the year from 69% to 73%.

This was mainly due to the decline in the portion invested in medium-sized and small UK
listed
companies from 19% to 16%.

The position in overseas listed companies also declined from 12% to 11%."


I make that to be 100% in listed companies.

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Re: Woodford Equity Income Fund Suspends Trading

#227499

Postby torata » June 6th, 2019, 2:52 pm

simoan wrote:
SalvorHardin wrote:This is a great advertisment for investment trusts over open-ended funds. In similar circumstances the investment trust's share price would fall without the need for forced sales.

Of course, this does not only apply to OEICs. The same also applies to some ETFs where there is a veneer of liquidity in the ETF instrument that is not mirrored by the underlying assets. I think some ETF holders are going to get a nasty shock at some point in the future.

All the best, Si


I'd be very interested in hearing more detail/explanation about your comment, Si. Are you talking about synthetic ETFs, stock lending in ETFs, or something else, for example, an ETF that is based in non-liquid assets like property/infrastructure? This is a genuine question, not bait. I have a feeling you've raised this point before, but I can't remember/find it.

torata

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Re: Woodford Equity Income Fund Suspends Trading

#227504

Postby OhNoNotimAgain » June 6th, 2019, 3:11 pm

Dod101 wrote: So I do not think that the people in the BBC piece highlighted by AiY were looking for something for nothing and indeed Woodford was all the more dangerous for having apparently been successful in the past. They were in other words lulled into a false sense of security, and it would almost be better to have no regulator than a thoroughly incompetent one.

Anyway by the standards of contributors to these Boards I would imagine that most of the population is ignorant about investing and I am sure they thought that due diligence had been carried out by HL. Alaric just beat me to it.

Dod


So the consistent warnings that "past performance is no guide to future returns" was ignored by all.

Anyway thinking these boards are populated by knowledgeable posters clearly suffers from the Dunning Kruger effect.

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Re: Woodford Equity Income Fund Suspends Trading

#227511

Postby simoan » June 6th, 2019, 3:32 pm

torata wrote:I'd be very interested in hearing more detail/explanation about your comment, Si. Are you talking about synthetic ETFs, stock lending in ETFs, or something else, for example, an ETF that is based in non-liquid assets like property/infrastructure? This is a genuine question, not bait. I have a feeling you've raised this point before, but I can't remember/find it.

torata

Don't listen to me, listen to the man - Howard Marks.

Essential reading, particularly page 7 of the memo: https://www.oaktreecapital.com/docs/def ... people.pdf

Essential viewing, Bloomberg interview: https://www.youtube.com/watch?v=bTj639snDOw

I love Howard but he does pull his punches a bit in the interview.

All the best, Si

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Re: Woodford Equity Income Fund Suspends Trading

#227521

Postby MusingMarket » June 6th, 2019, 4:08 pm

SalvorHardin wrote:This is a great advertisment for investment trusts over open-ended funds. In similar circumstances the investment trust's share price would fall without the need for forced sales.


I'd add the proviso "This is a great advertisment for investment trusts without discount controls over open-ended funds".

Investment Trusts are allowed to buyback 14.99% of shares per annum without a further shareholder vote. Since Woodford' Equity Income went from a 10.9bn fund to 3.7bn fund prior to suspension of trading it would have had major problems as an Investment Company if it had discount controls. There are a fair number of fashionable investment trusts that stay pretty strictly to the share price being at par to NAV and these trusts are advertised as such. Retail holders of such investment trusts are not going to take too kindly to a sudden loss of confidence in a manager leading to a huge run on the trust leading to a discount being inevitable which adds impetus to the run on the trust.

"I didn't realise I couldn't redeem at 24 hours notice" or "I didn't realise a wide discount could develop" which is worse? I'd say it's splitting hairs for the short-term psyche of the investor, there'll be panic either way.

mm

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Re: Woodford Equity Income Fund Suspends Trading

#227527

Postby Dod101 » June 6th, 2019, 4:26 pm

MusingMarket wrote:
SalvorHardin wrote:This is a great advertisment for investment trusts over open-ended funds. In similar circumstances the investment trust's share price would fall without the need for forced sales.


I'd add the proviso "This is a great advertisment for investment trusts without discount controls over open-ended funds".

Investment Trusts are allowed to buyback 14.99% of shares per annum without a further shareholder vote. Since Woodford' Equity Income went from a 10.9bn fund to 3.7bn fund prior to suspension of trading it would have had major problems as an Investment Company if it had discount controls. There are a fair number of fashionable investment trusts that stay pretty strictly to the share price being at par to NAV and these trusts are advertised as such. Retail holders of such investment trusts are not going to take too kindly to a sudden loss of confidence in a manager leading to a huge run on the trust leading to a discount being inevitable which adds impetus to the run on the trust.

"I didn't realise I couldn't redeem at 24 hours notice" or "I didn't realise a wide discount could develop" which is worse? I'd say it's splitting hairs for the short-term psyche of the investor, there'll be panic either way.

mm


I do not think I quite understand the comparison. There would be no 'run' on the trust. The 'run' if you can call it that might be on the share price but the underlying investments would remain intact. A severe loss of confidence in an IT would most likely lead to the manager being dismissed, because with most trusts there is another layer of protection, namely the Board of Directors which is of course absent in an OEIC or other mutual fund. It is true that the discount might widen and if there is a discount control mechanism in place that would cause the shares to be bought in, reducing the size of the fund. But the investor would never be locked out of selling his shares as can happen with a mutual fund. The comparison is simply not valid to my mind.

Dod

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Re: Woodford Equity Income Fund Suspends Trading

#227540

Postby MusingMarket » June 6th, 2019, 5:06 pm

Dod101 wrote:I do not think I quite understand the comparison. There would be no 'run' on the trust. The 'run' if you can call it that might be on the share price but the underlying investments would remain intact. A severe loss of confidence in an IT would most likely lead to the manager being dismissed, because with most trusts there is another layer of protection, namely the Board of Directors which is of course absent in an OEIC or other mutual fund. It is true that the discount might widen and if there is a discount control mechanism in place that would cause the shares to be bought in, reducing the size of the fund. But the investor would never be locked out of selling his shares as can happen with a mutual fund. The comparison is simply not valid to my mind.

Dod

I agree that what I quoted and what I wrote wasn't well aligned, mea culpa, should have made my point without quoting SalvorHardin.

Liquidity for a trust in distressed circumstances would be an issue though. Most investment trusts have covenants on debentures, bank loans and/or preference shares - they'd have to sell liquid assets on a call of debt. There could well be traders anticipating forced sales of underlying assets and, as with any other distressed share, you could see a halt in trading even if only temporarily. I'd also suggest that most board of directors are more aligned to their managers than an ACD is to an OEIC/UT (the ACD seems to have protected existing/remaining shareholders with WEIF).

When reading an Investment Trust report that says gearing is only 10%-20% of assets I immediately ctrl-f "debentures" and then "loans". You need to consider what would happen if the trust's assets falls back by two-thirds (that drop could be a combination of market sentiment, poor stock-picking, buybacks and gearing). It may seem implausible that assets would fall far and fast but I think it's a very possible grey-swan event. A grey-swan event not unlike the UK's best stockpicker for 25 years coming a cropper with three years of poor performance and, technically, only 10% of illiquid assets!

mm

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Re: Woodford Equity Income Fund Suspends Trading

#227543

Postby Lootman » June 6th, 2019, 5:10 pm

simoan wrote:
torata wrote:I'd be very interested in hearing more detail/explanation about your comment, Si. Are you talking about synthetic ETFs, stock lending in ETFs, or something else, for example, an ETF that is based in non-liquid assets like property/infrastructure? This is a genuine question, not bait. I have a feeling you've raised this point before, but I can't remember/find it.

Don't listen to me, listen to the man - Howard Marks.

Essential reading, particularly page 7 of the memo: https://www.oaktreecapital.com/docs/def ... people.pdf

Essential viewing, Bloomberg interview: https://www.youtube.com/watch?v=bTj639snDOw

That argument against ETFs would apply equally to ITs. Both can move to a discount in extreme market conditions. In fact it is normal for ITs to have significant discounts and premia at times. ETFs have been much better in that respect but it can happen in outlier conditions.

But the point with both ITs and ETFs is that you can still get out, even if at a discount. Whereas open-ended structures can simply decline to allow redemptions, which to my mind is much worse. They literally withdraw all liquidity rather than merely let markets do what they do - adjust the price to balance supply and demand, just as individual shares do.

Also bear in mind that an ETF does not have to sell shares for the simple reason that it doesn't actually own shares. Rather the market participants have to buy and sell shares to hedge their ETF positions. ETFs in general do not create any realised capital gains for the very same reason.

Finally ETFs are now a $5 trillion dollar business. ITs are tiny and really just a UK phenomenon.

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Re: Woodford Equity Income Fund Suspends Trading

#227552

Postby Luniversal » June 6th, 2019, 5:30 pm

torata wrote:
simoan wrote:
SalvorHardin wrote:This is a great advertisment for investment trusts over open-ended funds. In similar circumstances the investment trust's share price would fall without the need for forced sales.

Of course, this does not only apply to OEICs. The same also applies to some ETFs where there is a veneer of liquidity in the ETF instrument that is not mirrored by the underlying assets. I think some ETF holders are going to get a nasty shock at some point in the future.

All the best, Si


I'd be very interested in hearing more detail/explanation about your comment, Si. Are you talking about synthetic ETFs, stock lending in ETFs, or something else, for example, an ETF that is based in non-liquid assets like property/infrastructure? This is a genuine question, not bait. I have a feeling you've raised this point before, but I can't remember/find it.

torata


CTY has not been a brilliant performer of late, but at least you know it will be a cold day in Hell before Job Curtis is into cold fusion.

The question of what happens to exchange traded funds in a panic, especially synthetics, has never been tested. The ETF industry is essentially a mushroom growth of the years since the global financial crisis, closely associated with the flight to mediocrity that event engendered: trackers adopted as 'core' with actives on the side to gee total return up a bit.

Closet tracking was and is something of a myth, but overt tracking has become more and more easy to sell to your trustees or directors. Nobody will catch much flak for cleaving to the path of the herd. The Woodford story may make behaviour more herd-like: 'Look what befell the wise guy who thought he could mix styles and wander off the Footsie piste.'

For now more people are probably worried about smart, fancy and exotic ETFs that have sprung up around the original concept of plain-vanilla, broadly based and ultra-cheap replicators of indices. But nobody knows what would happen to the original, simple vintage if another 1929 or 1987 hit.

If so much of the market's motion (relatively calm in recent times, perhaps partly because of the swing to passives) is caused by pre-ordained buys and sells in a constant effort to be like everyone else, what gives when almost everyone wants out of equities? Ditto open-endeds such as unit trusts-- in particular the specialist, less liquid UTs which are much more common now than in the last prolonged apocalypse, 1974.

It is a shock that a fund such as Woodford Equity Income should require suspension at a time when markets are sanguine and when its mandate was meant to be predominantly long-term, tranquil and using conventional blue chips. But the deformations its portfolio took on may not be more potentially harmful, if a redemption stampede develops, than for a narrowly focused open-ended fund which stuck to its brief. Not only in known contentious areas such as private equity or real estate, but in the geographical and sectoral byways of sharepicking, stuff may prove hard to dump in a hurry when the unitholders are hollering for their cash back.

We do know what crises can do to investment trusts, generalist or not: prices can drop, sharply and painfully. They can sell at 20-50% below their net asset backing. In 2007-09 the real value of supposedly defensive, UK equity and income ITs in my 'Basket of Eight' halved. But income kept flowing, if a mite less of it, and trusts could be sold, at a price, all the time. For 150 years their format has withstood everything capitalism got wrong.

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Re: Woodford Equity Income Fund Suspends Trading

#227582

Postby AsleepInYorkshire » June 6th, 2019, 7:24 pm

https://www.bbc.co.uk/news/business-48540911

Treasury Committee chair Nicky Morgan said that investors in the Woodford Fund had been "locked out of accessing their cash" but that it had been reported that "Mr Woodford is taking in nearly £100,000 in management fees a day".

Does anyone know what Woodfords costs will be for running the fund?

Because (rather cynically I know) there only seems to be one guaranteed benefactor in all of this ... I may have to rethink my career strategy :shock:

AiY

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Re: Woodford Equity Income Fund Suspends Trading

#227600

Postby XFool » June 6th, 2019, 8:43 pm

Luniversal wrote:CTY has not been a brilliant performer of late, but at least you know it will be a cold day in Hell before Job Curtis is into cold fusion.

Hah! I'm not involved here but I hope, had I been, that would have been the OUT signal.

Luniversal wrote:We do know what crises can do to investment trusts, generalist or not: prices can drop, sharply and painfully. They can sell at 20-50% below their net asset backing. In 2007-09 the real value of supposedly defensive, UK equity and income ITs in my 'Basket of Eight' halved. But income kept flowing, if a mite less of it, and trusts could be sold, at a price, all the time. For 150 years their format has withstood everything capitalism got wrong.

Excepting 1929 in the US - why ITs are now pretty well extinct there - and the Split Capital Trusts debacle in the UK?

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Re: Woodford Equity Income Fund Suspends Trading

#227605

Postby PhaseThree » June 6th, 2019, 9:13 pm

Before anyone has a coronary regarding Woodfords support "cold fusion" please read the following :-
https://spectrum.ieee.org/energy/nuclea ... -reactions.
Definitely not fusion despite the gross misreporting of the press.

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Re: Woodford Equity Income Fund Suspends Trading

#227607

Postby Snorvey » June 6th, 2019, 9:17 pm

Yes but....well. it's total cobblers isn't It?

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Re: Woodford Equity Income Fund Suspends Trading

#227623

Postby Alaric » June 6th, 2019, 10:12 pm

PhaseThree wrote: Woodfords support "cold fusion"


Here's a link
https://woodfordfunds.com/funds/holding ... rial-heat/

He was punting 2.59% of the Equity Income Fund and 9.02% of the Patient Capital Trust.

There's a discipline known as "quantum chemistry". That uses the mathematics of quantum mechanics in conjunction with more conventional chemistry. Do "Industrial Heat" have any experts on this on board?

Either way, 9% of the IT is a lot of money to put into a controversial technology.

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Re: Woodford Equity Income Fund Suspends Trading

#227633

Postby Luniversal » June 6th, 2019, 11:30 pm

XFool- 'Investment trusts' in the Roaring Twenties had nothing in common with British ITs of 1868 et seq. vintage except the name. The American pyramids such as Blue Ridge were more like unit trusts, and made their difficulties worse by taking in each other's washing. Galbraith's The Great Crash is the locus classicus for them.

it is telling that British ITs were heavily invested in Wall Street at the time, but much more in bonds than common stock. The default rate among fixed interest was surprisingly low in the worldwide slump. A few fly-by-night IT launches from the Twenties quickly failed, but the big older names were fairly safe havens during the Depression, although some cut dividends (but against a deflationary background). On balance the sector's reputation was enhanced by its showing during the 1930s.

'REITs' are not the same as authorised UK investment trusts either, though in times past some property investment vehicles called themselves that: for instance, Land Securities was 'Land Securities Investment Trust' and was nicknamed 'Landsits' on the Exchange. The terminology is terribly muddled.

Everyone brings up the splits scandal-- I was a victim-- but it was 30 years ago and confined to a minority of ITs, really the only big contretemps of that sort in 150 years. It was more about actuarial naivety than larceny.


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