Link Fund Solutions Limited (Link), the Authorised Corporate Director of the LF Woodford Equity Income Fund (“the fund”) has formally reviewed the suspension of the fund. Link previously indicated that it was anticipated that the suspension of dealing is likely to last until early December 2019 while the portfolio of assets held by the Fund is re-positioned. Based on the progress made to date, they remain of the view that this is a realistic timeframe and therefore have decided that it remains in the interests of all investors for the suspension of dealings to continue.
We appreciate that the ongoing suspension of the fund will be causing you inconvenience and anxiety. The decision to continue with the suspension is to ensure investors’ interests are protected. It affords Neil and the team the required time to execute the changes to the portfolio that we have outlined previously, in order to deliver the best possible outcomes for you, our investors.
As we have said previously, when the fund reopens, you will see a much more liquid portfolio, but one that reflects the same investment strategy. The portfolio will continue to be focused on undervalued companies, but the majority of them will be FTSE 100 and FTSE 250 index constituents. Neil and the team continue to make progress in this regard. To date, more than 80% of the proceeds from share sales since suspension have been reinvested in FTSE 100 companies.
We remain committed to operating the fund in a way that best protects the interests of investors, both for those who wish to remain invested and for others who will seek to withdraw from the fund when the fund reopens. In light of this, and after consultation with Link, we have decided to withhold disclosing the top 10 holdings while the fund is suspended.
We continue to make progress focusing the fund’s portfolio towards the few areas of the market which, we believe, continue to offer valuation appeal and to the economic sectors with enough internal momentum to withstand the growing global headwinds.
As we highlighted in our previous update, this strategy has not delivered the returns we had anticipated over the past couple of years. The suspension did have an immediate impact on performance in the short term with the fund underperforming its benchmark significantly (FTSE All Share Total Return Index) during the first 28-day period.
The situation improved during the second 28-day period in July, with the fund outperforming, albeit marginally.
However, over the latest 28-day period of suspension the fund has underperformed its benchmark – which can be primarily attributed to the share price decline of two of the fund’s larger holdings, Burford Capital and Industrial Heat.
The price of Burford’s shares declined sharply after it came under fire in a report from a US-based investment firm. The company has since provided a comprehensive rebuttal of all the allegations.
Meanwhile, Link, supported by analysis from IHS Markit, reviewed our unquoted holding Industrial Heat as a part of Link’s six-monthly review process and determined that progress had not been at the pace anticipated at the time of the previous reviews. On Friday, Link issued a valuation adjustment for Industrial Heat. This has not been as a result of a “triggering event”1 as defined in Link’s Fair Value Pricing policy. We are not responsible for unquoted valuations across any of our funds. Link is ultimately responsible for the pricing and valuation of unquoted stocks and it is assisted by an independent valuation company, IHS Markit, in the valuation process. The change in valuation will be reflected in the fund’s closing NAV as at 23 August 2019.
Neil continues to reposition the portfolio while still reflecting the same investment strategy. To reiterate, that strategy is founded on a belief that the global economic environment is not as robust as equity markets are implying. We continue to believe that macroeconomic data is supportive of this thesis.
The suspension and the circumstances that led to it, may have had an impact on the price of some of the fund’s assets in the short term. Identifying situations where price and value diverge has been at the centre of Neil’s investment approach over his entire career – and is still determining a strategy that he believes is appropriate for the economic and market environment that confronts us.
1A triggering event may include any of the following:
- a subsequent round of financing (whether pro rata or otherwise) by the relevant investee company
- a significant or material milestone achieved by the relevant investee company
- a secondary transaction involving the relevant investee company on which sufficient information is available
- a change in the makeup of the management of the relevant investee company
- a material change in the recent financial performance or expected future financial performance of the relevant investee company
- a material change in the market environment in which the relevant investee company operates; or
- a significant movement in market indices or economic indicators