Hedgies circle Woodford fire sale; HL boss apologises

Hedge funds are hoping to profit from the misery of Neil Woodford’s investors by betting £900m that shares held by the ill-fated Woodford  Equity Income Fund will plummet as the fallen-star fund manager is forced into a fire sale.

This ‘Big Short’, is another blow to Woodford whose reputation has been badly damaged; a series of Woodford favourites have been the target of short-sellers, including Barratt Developments, Crest Nicholson, Kier and We Buy Any Car owner BCA Marketplace.

Short-selling, is when an investor borrows shares and immediately sells them, hoping to buy them back at a lower price when the price of the stock falls; they then return the stock to the lender and the difference is their profit minus a fee for the loan.

‘This ‘Big Short’, is another blow to Woodford whose reputation has been badly damaged’

It is reported that almost one in seven investors in these firms is betting the share price will fall; such sentiment can result in a momentum all of its own, and further companies are expected to be targeted as Woodford seeks to sell off his ‘illiquid’ assets in small listed, or unlisted entities.

However, the issue of liquidity that has at least in part fuelled the crisis could hamper those looking to short smaller FTSE 350 or AIM stocks, because it will not be easy for them to borrow stock to sell.

Woodford is one of the few City investment managers who publishes a full list of his holdings, but this transparency could make it even more likely that his investments will be targeted by rival fund managers.

Previously afforded rock-star status, Woodford enjoyed a large and happy following as Britain’s best known stock-picker, even mentioned in the same sentence as ‘The Sage of Omaha’ – legendary US investor Warren Buffett.

However, Woodford last week blocked investors from withdrawing money from his flagship fund – saying the huge outflows were making it impossible for him to revive its fortunes; he has pledged to spend at least the next 28 days reshaping the fund which is expected to remain shut for months.

Woodford is expected to sell down some of his stock so that the fund can pay back investors who want out, but the challenge will be to do so in a way that doesn’t spark a City-wide trading frenzy.

Analysts fear that if Woodford reopens the fund and is forced to sell large quantities of shares, the market is highly likely to send prices down even lower; conversely, Mr Woodford has said that he will reposition the fund into bigger, liquid companies, and for that Mr Market may charge him a premium.

A number of firms that count Woodford as a major investor have already seen their share prices sink. Kier, of which Woodford owns 10%, fell 44% last week, following  a profit warning; Stobart, IP Group and the AA fell 12%, 8% and 7% respectively.

According to IHS Markit, 14% Kier’s shares and 9% of Crest Nicholson’s are out on loan, indicating shorting; iIn total, IHS Markit figures show that just over £900 million shares across 43 listed firms in Woodford’s equity income fund are out on loan.

Last week Woodford denied the suggestion he is conducting a ‘fire sale’ of assets as it was reported he had already sold £600m of stock; his fall from grace has already led to several major clients abandoning him, including financial advisers St James’s Place and the UK’s largest platform for DIY investors, Hargreaves Lansdown.

Chris Hill, chief executive of Hargreaves Lansdown has issued an apology following the suspension of Mr Woodford’s fund, saying he shares clients’ ‘disappointment and frustration’.

‘I would like to apologise personally to all clients who have been impacted by the recent problems with the Woodford Equity Income Fund,’ Mr Hill said.

‘We all share their disappointment and frustration. Our priority right now is to support our clients and keep them informed.’

‘Our priority right now is to support our clients and keep them informed’

The broker promoted the fund to clients through its ‘Wealth 50’ list – essentially a best buy list – that has considerable influence in the market; however, despite its suspension, Mr Hill says that the firm stands by its research.

Former City Minister Lord Myners told the BBC that the UK’s financial regulator ‘should have been awake’ to problems at Mr Woodford’s investment fund; he said Financial Conduct Authority had missed ‘clear warning signs’ that things were going badly.

‘Our aim remains to provide the best possible service and choices to allow people to manage their investments simply and effectively,’ said Mr Hill. ‘The shortcomings of one fund should not detract from the benefits of favourite fund lists like the Wealth 50.

‘We are confident in the robustness of how we analyse, research and compile our favourite fund list with a focus on ensuring best value for customers; nonetheless, we are reviewing this specific situation to ensure we learn from it and address it for the benefit of our customers going forward.

Hargreaves Lansdown has now dropped the Woodford fund from its favourites list, and bowed to pressure to drop its platform fee for investors in it; however, despite the broker cutting its fee, the fund manager has not followed suit.

Chair of the Treasury Committee Nicky Morgan said investors in the Woodford Equity Income Fund should not be charged management fees while trading in the fund was suspended; that could currently be one of the least of their worries.