You may have seen in the news that the Woodford Equity Income fund has been frozen. As a client of the firm you shall no doubt be pleased to hear that the fund has never been included in Burton & Fisher’s model investment portfolios, and as such there is no immediate concern for clients. None the less this is a situation which places one of the UK’s most lauded fund managers, Neil Woodford, in hot water. It also teaches investors some important lessons, whether you hold the fund or not.
Neil Woodford’s fund may have been frozen, but it isn’t the first and certainly won’t be the last. It is an issue we face in modern “open-ended” structures, where investors demand daily liquidity from assets that sometimes aren’t suited to daily trading.
What Does a Frozen Fund Mean?
It is important to define what a frozen fund means. In basic terms, it means blocking investors from selling and buying the fund. This is very different from a company or fund going bankrupt, as investors still have ownership of the assets. Investors aren’t allowed to sell or buy, but this is a legal method to protect against a fire sale of the underlying assets they own. In a perverted way, this is intended to protect investors in the long term by stemming short-term liquidity concerns.
In Woodford’s case, part of the trouble was that he invested up to 20% of the fund in unlisted or unquoted assets, usually via direct ownership in private companies. In many cases, there was nothing wrong with holding these assets, except that they are very hard to sell in a hurry.
Understanding Open-Ended Structures
We see the same risk in many other assets. Take a property purchase for example. If you buy a home with a family member, you can’t offer each other daily buying and selling because you don’t have the freedom of liquidating a living room. The house may be fine as an investment, but an “open-ended” structure could involve unwanted risks as you can’t fund withdrawals.
The open-ended structure is therefore a double-edged sword. It has the big benefit of allowing daily liquidity for those that need it (especially retirees, who often take comfort from having access to their assets), but with this comes the risk of fund freezes.
Should We Fear a Frozen Fund as Long-term Investors?
An interesting question is whether a frozen fund is a bad thing. In many ways, it reminds us of Warren Buffett’s quote that you should “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”. If you can get your head around the fact you don’t have near-term access to your money, you may actually do quite well even with a frozen fund. The key is to maintain your focus on the long term.
An example that might bring this to life occurred back in 2016 when several “open-ended” property funds froze to redemptions. Investors that exited at the earliest possible moment lost quite a bit of money (assets were trading at a discount to their worth), while those that opted for patience could trade normally once the dust had settled.
So, while Neil Woodford is unlikely to be popular for the freezing of his Woodford Equity Income fund, it may not mark the end. A frozen fund isn’t ideal, but it does not necessarily mean the end of the world for long-term investors.
You can hear more reassurance and facts about the suspension of the LF Woodford Equity Income Fund from Neil Woodford himself in the video below:
If you require any financial advice regarding pensions, investments or your investment portfolio, we recommend speaking to our financial advisors in Lancaster to help you achieve your financial goals.