Monday 20 May 2019 4:53 pm

Analysts downgrade Neil Woodford flagship fund due to ‘underperformance’

Jess Clark is a City A.M. news reporter covering private equity and investment.

Jess Clark is a City A.M. news reporter covering private equity and investment.

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Analysts at Morningstar have downgraded veteran investor Neil Woodford’s flagship fund due to underperformance.

Woodford Equity Income fund’s rating was lowered from bronze to neutral, which is the research group’s second lowest ranking, following “persistent” redemption requests as investors exit.

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The fund, which was downgraded from silver to bronze by Morningstar last year, has shrunk from highs of £10.2bn in 2017 to £4.3bn.

“Persistent redemptions, underperformance, and stock-specific issues, combined with the manager’s relentless willingness to push the portfolio to its liquidity limit, have resulted in portfolio positioning that we consider extreme,” Morningstar associate director Peter Brunt said.

“We are therefore lowering the strategy’s Morningstar Analyst Rating to Neutral from Bronze.”

Woodford has been forced to take “extreme” action to reduce the proportion of fund assets that are invested in unquoted or less liquid stocks in order to keep unquoted exposure below 10 per cent.

The fund manager listed some of his stakes in unquoted stocks on Guernsey's International Stock Exchange and swapped some unquoted stocks from the Equity Income fund to his Patient Capital investment trust.

Brunt added: “Continued redemption and the delaying of several unquote names from IPO have forced the group to take extreme action to keep unquoted exposure below the 10 per cent regulatory limit.

"While so far it has successfully managed to meet these demands, the portfolio now has one of the least liquid profile in the market.”

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A Woodford spokesperson said: “We have independent liquidity oversight from Link as ACD for the fund. It undertakes its own oversight of the fund and is ultimately responsible for the fund’s compliance with the UCITS investment restrictions and requirements regarding liquidity and valuation.

"Liquidity limits and stress testing are all agreed with Link and monitored by both Link and Woodford and via discussions with NT Depository.

"The fund is managed so it can stay within its agreed liquidity limits and these are set conservatively so the fund can comfortably meet any redemption as they fall due.”