June 4, 2019 / 5:33 PM / 13 days ago

British money manager Woodford's star wanes over locked fund gate

* LF Woodford Equity Income Fund gated on Monday

* Follows increase in demand to redeem by clients

* Regulator considering tougher rule on illiquid assets

By Simon Jessop and Carolyn Cohn

LONDON, June 4 (Reuters) - Famed for eschewing the tech bubble and sticking with tobacco and pharmaceuticals as others sold out, Neil Woodford’s cult status among British money managers is on the ropes after some of his investors were unable to recoup their money.

When Woodford struck out on his own from Invesco and launched Woodford Investment Management, billions of pounds flowed into his funds, which often bucked conventional market wisdom and included riskier, less liquid investments.

His strategy mirrored a trend among institutional investors to increase their allocation to private equity as stock market valuations made listed companies look expensive.

But some of his listed and unlisted bets have not worked out, including British subprime lender Provident Financial and construction group Kier, prompting many investors to demand their money back.

After struggling to free up cash to pay investors looking to get their money out, 59-year-old Woodford “gated” his LF Woodford Equity Income Fund to fresh withdrawals on Monday. From a high of 10.2 billion pounds in May 2017, the fund now holds around 3.7 billion pounds.

Whereas private equity funds usually raise money before closing a fund for an agreed period lasting years, Woodford’s was open-ended, meaning clients could demand their money daily - something that had already raised eyebrows.

“The suspension underlines our concern over the illiquid nature of the portfolio,” Morningstar analyst Peter Brunt said on Tuesday, adding that the situation would “take weeks rather than days to become fully resolved”.

The suspension is designed to allow Woodford time to move more of the fund’s investments into more liquid assets, as well as protect those investors who wish to remain in the fund from any fire sale of assets to meet redemption requests.

As part of Woodford’s attempt to restructure his holdings, a number of the Income Fund’s unlisted holdings, including those in Atom Bank, Cell Medica and RateSetter, have been moved to his listed Woodford Patient Capital Trust.

Darius McDermott, managing director at Chelsea Financial Services, said the gating was a “very, very, very rare occurrence in the equity world”.

“We do see a small increase, around the edges, particularly in small and mid-cap funds, of them owning a couple of percent of illiquid or unquoted stocks, but nothing at this level.”

Kent County Council, which had asked to redeem its 263 million pound investment on Monday was one of those denied its money. A council spokeswoman said on Tuesday it was having “ongoing discussions” with Woodford about getting its money back, describing the “gating” decision as “disappointing”.

Woodford declined to specify how many other pension scheme investors had been locked in by the gating decision.

FIRE SALE

Britain’s financial regulator is already considering toughening up the rules governing fund holdings in illiquid assets such as property or private equity after seven property funds totalling 18 billion pounds in assets under management froze in July 2016, shortly after the Brexit referendum.

The funds all reopened within weeks, but the Financial Conduct Authority launched a consultation late last year, with a final ruling - and possible new rules - expected in mid-2019.

“If you’ve got illiquid assets, you should have them in a closed-ended fund rather than an open-ended fund, because you don’t’ want to be forced to sell these things if you have a few redemptions,” Cliff Weight, director at ShareSoc, which represents individual investors, said.

Woodford had made off-market bets on companies a small but key part of the strategy for his Equity Income Fund, aiming to capture outsize returns as winners materialised.

Critics say he tended to keep its unlisted holdings close to the 10 percent regulatory limit for investments in unlisted assets that funds like Woodford’s face.

Since its launch, the Income Fund has returned 11% against a 34% return for the FTSE All Share index. Over the last year it is down 8.3% against a gain of 2.6% for the index, data on the company’s website showed.

Despite this performance, Emma Wall, Head of Investment Analysis at fund supermarket Hargreaves Lansdown, said it would be unlikely to signal the end for Woodford.

“The last couple of years have been difficult... but his longer-term performance does remain compelling; he’s up 121% over 10 years,” said Wall at Hargreaves Lansdown which has long been a major backer of Woodford’s funds. ($1 = 0.7877 pounds)

Reporting by Simon Jessop and Carolyn Cohn; Editing by Alexander Smith

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