Bloomberg Businessweek - USA (2019-06-24)

◼ FINANCE Bloomberg Businessweek June 24, 2019

34

DATA: MORNINGSTAR

100%

50

0

● WoodfordEquity

Incomefundallocation,

bysizeofcompany

6/2014 4/2019

Large-cap

Small- and

micro-cap

Mid-

cap

clients’moneyoutofInvescoandparkedit with

Woodfordjustashisfirm,WoodfordInvestment

Management,wasgettinggoing.“Weweren’t

backingWoodfordInvestmentManagement,and

weweren’tmakinga statementaboutInvesco,”

St.James’sPlaceChiefExecutiveOfficerDavid

Bellamy said in 2016. “We were with Neil.”

(St.James’sPlace,whoseinvestmentsweren’tin

EquityIncome,cutitsrelationshipwithWoodford

afterthefreeze.)

Inhisfirstyearonhisown,Woodford’sEquity

Incomefundgained16%,beatingall 50 ofitspeers

trackedbyBloomberg.Hehasmaintaineda bullish

stanceonBrexit’simpactontheBritisheconomy,

a contrarianpositionthathelpedkeephisventure

inthespotlightevenasreturnsfaltered.

Inthefirm’searlydays,Woodfordfocused

onpickinglarge,liquidstocks.Overtimehe

movedtowardsmallercompanies.Whatstarted

asagradualshiftdramaticallyalteredthepro-

fileofhisfund.Inthemostrecentportfoliodis-

closurebeforehefrozeassets,Woodfordhad

allocatedalmostallofhisfund’sassetstosmall

and medium-size companies, according to

Morningstardata.Someinvestments,including

BenevolentAIandIndustrialHeat,weren’teven

listedona majorexchange.

“Ifyouownanactivelymanagedfund,you

havetoknowwhatis heldinthefund,”saysJoshua

Mungavin,a financialplanneratEvensky& Katz/

FoldesFinancialWealthManagementinCoral

Gables,Fla.“Ifthestocksownedbythefundare

thinlytradedornottradedonthepublicmar-

kets,thenyouknowthereis alwaysa riskthefund

couldbecomeasilliquidasitsunderlyingassets.”

Inotherwords,youmightfindthatyoucan’ttake

yourmoneyoutwhenyouwantit.

TheEquityIncomefundwashitbydeclinesina

numberofitspositions,includinglistedstockssuch

astheonlinerealestateservicePurplebricksGroup

PlcandconsumerlenderProvidentFinancialPlc.

Thepoorperformanceledinvestorstopullmoney

out,anditsassetsdroppedby£560millioninMay

alone.Thewithdrawalsbegantoputpressureon

Woodford.Toavoidbecominga forcedsellerof

shares—andpotentiallyhavingtoacceptfire-sale

prices—thefirmsaidatthestartofJunethatthe

fundwasfreezingredemptions.

IntheU.K.,fundsareallowedatmost10%

oftheirassetsinunlistedsecurities.According

totheU.K.’sFinancialConductAuthority,the

fundtemporarilybreachedthatlimittwicein

early2018. Some companies in which Equity

Income owned shares were later listed on the

International Stock Exchange on the small island

ofGuernsey,helpingthefundtostaywithinthe

rules.OnJune18 the watchdog agency said it

was investigating events that led to the freeze.

Woodford isn’t the first fund manager to run

intoliquidityproblems.WhentheU.K.votedto

leavetheEuropeanUnionin2016,thecountry’s

largestrealestatefundsfrozealmost£9.1billion of

assets as investors rushed to get their money out.

M&G Investments, Aviva Investors, and Standard

Life Investments all stopped withdrawals from the

funds devoted to illiquid property assets. Those

funds later reopened after markets calmed.

In the U.S., there’s Third Avenue Management, a

mutualfundcompanyfoundedbylegendaryvalue

investorMartyWhitman.Thefirmmanagedasmuch

as$26billion in 2006, but it was hit hard in 2015,

when its Focused Credit mutual fund imploded. As

thecrisisescalated,thefund,whichinvestedinjunk

bonds,bannedwithdrawals.It wasfinallyliquidated

in2018, with shareholders getting about 85% of the

fund’s value at the time it shut its doors.

The U.S. Securities and Exchange Commission

says investments in illiquid products should be no

more than 15% of a fund’s net assets. But concerns

about funds investing in potentially hard-to-sell

assets remain on both sides of the Atlantic. Federal

Reserve Chairman Jay Powell and Bank of England

Governor Mark Carney have noted in recent

speeches that some investment funds hold illiquid

debt securities. At the same time, fund companies

areofferingnewproductsdesignedtomakewith-

drawalsharder,sothattheycanownmorethinly

tradedassets(seethefollowing story).

What happened to Woodford is still extremely

rare, especially for an equity manager. But even

setting aside the withdrawal freeze, the fund’s

poor performance will be a piece of evidence for

those who argue that most investors are better off

putting their money in a diversified index. And

it shows that even investors who do want to try

to beat the market would be wise to spread their

bets. “Woodford’s story is simply one more pain-

ful reminder of the importance of diversifying—not

only among different asset classes such as stocks

and bonds but also among the different manage-

ment firms who invest in them,” says Bruce Colin,

an independent wealth manager based in Rancho

PalosVerdes,Calif.“Individualswhochooseto

investwitha singlefundmanager,particularlyone

witha nearcelebrity-like following, should be par-

ticularly attentive to the risks they are courting.”

�SuzyWaiteandAnnieMassa

THE BOTTOM LINE It’s unusual for mutual funds to tell investors

they have to wait to get their money out, but it can happen when

managers take risks on hard-to-sell assets.