After a “run on the fund” triggered when people figured out it was loaded up with crappy illiquid assets
Hundreds of thousands of investors trapped in the imploded and shuttered Woodford Equity Income (WEI) fund, which is now down to £3.1 billion, could lose a third or more of their remaining investment by the time the fund is wound up, according to an analysis commissioned by the fund’s administrator Link Fund Solutions.
In a base case scenario modeled by private equity specialists PJT Park Hill last month, losses could reach 32.5% of total funds as the fund is liquidated. Under the worst-case scenario, the fund’s value would fall by 42.6%.
In other words, the fund’s investors could collectively lose between £1 billion and £1.3 billion of their remaining funds. This would be on top of the losses they already suffered in the years preceding the gating of the fund five months ago. Between 2015 and June 2019, when the fund was shuttered, the total amount under management at WEI shrank by almost two thirds, from £10.2 billion to £3.1 billion, as its portfolio has unwound dramatically.
As an “open-end” mutual fund, WEI had to sell some of its assets each time an investor asked to redeem their funds, which they could do at just about any time. This is not a problem when the assets in question are highly liquid, such as large-cap stocks. But when the assets are bonds, loans, real estate, large positions of thinly traded small-cap stocks, or unlisted shares that can take days, weeks or even months to sell, there is a mismatch in liquidity between what the fund offers to its investors (daily liquidity) and what the fund holds (largely illiquid assets). A “run on the fund” can be catastrophic for this type of fund, one of the oft-undisclosed risks of investing in open-end mutual funds.
In the case of Woodford, his specialty was small-cap stocks and holdings of unlisted start-ups in the tech or biotech sectors — assets that can take a long time to offload. When, at the beginning of June, Kent County Council, a longstanding backer of Woodford, requested the return of approximately £250 million, there was no way he could sell assets quickly enough to redeem the funds. Instead, he placed a ban on redemptions, meaning that investors who hadn’t already yanked out their money, including Kent County Council, were trapped. Now, they stand to lose as much as 42% of their money.
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