Hedge funds have field day front-running the liquidation. 300,000 investors left twisting in the wind.

By Nick Corbishley, for WOLF STREET:

Neil Woodford, the manager of shuttered asset management fund, Woodford Equity Income fund, just had one heck of a black Friday. First came news that Link Fund Solutions, which manages the corporate governance of Mr Woodford’s investment vehicles, had slashed the valuation of cold fusion developer Industrial Heat, one of Woodford’s largest unquoted holdings, by around 40%, from £91.3 million to £55 million.

The move will shave 4.3% off the net asset value of the Woodford Patient Capital (WPCT) investment trust. Having plunged since the suspension of Woodford’s flagship Woodford Equity Income fund (WEI), shares in the trust dropped a further 5.5% on Friday to 41.5p and are now down 46% year to date. Industrial Heat is also held by WEI. Valued at £115 million at the end of December, that stake is now likely to be worth around £70 million, knocking around 1.4% off the fund’s value.

Then came the second blow: another big Woodford holding, British haulage company Eddie Stobart, announced that it was suspending trading in its shares and had fired its CEO after an accounting investigation had found the group’s profits had been overstated. Twenty-three percent of the company’s shares, already down 47% in the last year, belong to Woodford. As long as the shares remain suspended, there’s no way he’ll be able to sell them.

Since deciding to gate WEI on June 3, Woodford has been desperately trying to sell down the fund’s holdings of lightly traded micro-, small- and mid-cap stocks that made up 97% of its assets at the end of May. Small and mid-cap assets can often yield higher returns — between July 2009 and July 2019 the mid-cap dominated FTSE 250 index returned 67% more than the UK’s large-cap index, the FTSE 100 — but they’re also riskier and harder to sell in a hurry, especially if you’re holding a large stake.

Since suspending his flagship fund in early June, Woodford has raised at least £650 million by offloading listed assets held in his frozen flagship fund, according to research by Bloomberg. It’s a step in the right direction but it’s not nearly enough. And every step of the way, hedge funds are one step ahead, mercilessly shorting any listed stock before it’s sold.

A case in point is the litigation funding specialist Burford Capital, which was the second largest holding in Woodford’s gated flagship fund representing 5.8% of total assets at the end of April. Until the beginning of this month, Burford was one of the strongest performing stocks in Woodford’s portfolio, having soared in value more than tenfold in just five years. That was before Muddy Waters Research launched a full-frontal assault on the company’s financial status on Aug 7, since which time Burford has lost around half of its market cap — over £1 billion.

Muddy Waters said that Burford Capital “actively manipulates” its performance metrics and “greatly misleads investors.” It also criticized the company over the fact that its CFO was married to the CEO, a highly irregular situation that has since been remedied with the re-assignment of the CFO.

For its part, Burford accuses Muddy Waters of “illegal market manipulation,” claiming it was victim to “spoofing” and “layering” practices, which are used by sophisticated market players to artificially drive down share prices.

For Woodford, the rout in Burford’s shares has been particularly painful. His stake in the firm, worth £212 million less than a month ago, has since shrunk in value to barely £100 million.

Problems are also mounting for many of Woodford’s healthcare stocks, which account for 23% of his flagship fund. Woodford cut his teeth investing in large healthcare companies for the giant fund manager Invesco, but reinvented himself as a venture backer of early-stage life sciences start-ups when he founding his eponymous firm in 2014. Many of those firms are now struggling, with 16 of the 20 listed healthcare stocks he picked for WEI sharply down in value since the beginning of the year, according to analysis by the London Evening Standard.

  • Nucana, a UK drugs developer backed by Woodford, is down 48%.
  • Autolus Therapeutics has fallen nearly 70% this year since announcing a five-month delay in building a critical drug-testing facility.
  • Verseon has plunged 90% after revealing plans to use blockchain technology to fund drug trials.
  • Other healthcare stocks such as Circassia Pharmaceuticals, Mereo Biopharma, Prothena, Tissue Regenix and 4D Pharma are down between 20% and 60% so far this year.

Given such dismal results, it’s hardly surprisingly that Bestinvest’s twice yearly “Spot the Dog” report recently crowned Woodford’s troubled Equity Income fund as the UK’s worst-performing fund. When it comes to “dog funds,” Woodford Equity Income fund is “the worst performer of all … managing to turn £100 invested into £80 over the three years assessed,” said Jason Hollands, managing director at Bestinvest.

Since the suspension alone, two months ago, WEI has fallen by 11.2%, compared with a 1.5% gain on its benchmark index, the FTSE All Share Total Return, according to LINK. Woodford Investment Management attributedmost of its under-performance in the last seven weeks to the share price decline of Burford Capital and Industrial Heat.

In a letter to investors, Link Fund Solutions assured that the latest target date for reopening Woodford Equity Income fund, early December, “remains achievable”. Woodford Investment says it is reinvesting more than 80% of the proceeds from the sales of WEI’s stakes in FTSE 100 companies, suggesting the fund’s strategy is moving toward liquid, quoted hi-cap stocks, as many investors originally thought was the case.

For the moment, such lofty promises are scant comfort for the more than 300,000 investors whose money is trapped in Woodford’s flagship fund. They know that if the suspension is lifted, what they receive will be less, probably a lot less, than what they put in. And for the time being, there’s no sign of light at the end of the tunnel. By Nick Corbishley, for WOLF STREET.

The exodus from funds with illiquid assets forces more funds to block redemptions. Read…  Liquidity Crunch Mangles UK Equity & Real Estate Funds

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