The Neil Woodford suspension scandal: don’t say you weren’t warned

While the suspension of Neil Woodford’s Equity Income fund has come as a shock to many investors, there were warning signs that the fund was extremely risky says Edward Sheldon.

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Earlier this week, investors in Neil Woodford’s Equity Income fund were hit with the shock news that trading in the fund has been suspended, meaning that they cannot currently access their funds. Undoubtedly, the situation is an absolute debacle, with one city veteran even saying: “I can’t remember anything quite like this.”

However, considering the risky nature of this fund, I’m really not that surprised by the suspension of the shares this week. In fact, I have been warning investors about the dangers of investing in this very fund for over two years now.

Early warning signs

For example, back in January 2017, I wrote an article entitled ‘Don’t invest in Neil Woodford’s Equity Income fund until you’ve read this.’ At the time, I was still actually an investor in the fund myself after jumping in during 2014, however, I noticed that the fund had evolved significantly since its launch and no longer looked like a traditional ‘equity income’ fund. It contained a number of smaller companies, as well as a number of unquoted companies, and that concerned me.

Performance deteriorated

With performance starting to deteriorate rapidly, I bailed out of the fund early last year, and penned an article entitled ‘Why I just sold my holding in Neil Woodford’s Equity Income fund.’ In this article, I explained that the composition of the portfolio had become even more alarming and that the fund was no longer what I was looking for within my SIPP.

For example, online real estate agent Purplebricks, which wasn’t making a profit, was the seventh-largest holding in the fund, and Prothena, a US biotechnology firm with no dividend, was the eighth largest. It concerned me that these kinds of stocks were held within an equity income fund and it turns out that was a valid concern as both stocks have since crashed.

A risky fund

More recently, in April this year, I took another close look at Woodford’s Equity Income fund and declared that it looked “quite risky.” It had very little exposure to the FTSE 100 and the only stock in the portfolio that I saw as a blue-chip was tobacco giant Imperial Brands. The rest of the portfolio was an odd mix of housebuilders, early-stage companies with no profits or dividends, and unquoted companies. And given that the fund had performed terribly and was ranked 246th out of 247 funds in its class over three years, I stated that I would continue to avoid it.

So, in hindsight, there were plenty of warnings there. In the space of a few years, Woodford’s offer had evolved from a fairly traditional equity income fund that was holding a number of FTSE 100 stocks and performing well, into one that resembled a mix between a small-cap growth fund and a private equity vehicle and was considerably riskier.

While investing is a long-term game, sometimes the key is to cut your losses and adjust your strategy if the information you’re faced with changes significantly.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon owns shares in Imperial Brands. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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