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Woodford’s Whack-A-Mole is getting out of control – could be game over pretty quickly

By Cynical Bear | Saturday 10 February 2018


CityAM announced earlier this week that Woodford’s Equity Income Fund had lost a billion quid in funds since the start of the year down to £7.2 billion. This has huge consequences for all his funds and I’m not sure he has enough arms to suppress all the troublesome blind burrowing mammals raising their heads above ground. For the avoidance of doubt, I am referring to metaphorical moles at this point rather than Woodford’s investment diligence team. Let me explain.

To be fair, it appears that a significant factor in that billion pound drop is performance-related rather than redemptions as the Equity Income Fund has had a shocking year-to-date. Nevertheless, the fund was already at its unquoted investment limit so if the total funds are now £7.2 billion, I calculate that Woodford needs to offload about £100 million further of unquoted stock.

As I covered in great detail over Christmas, Woodford has had his work cut out keeping The Gravy Train (aka his Equity Income Fund) on the rails and has done so in the second half of 2017 as funds dropped from £10 billion to £8 billion by “selling” a chunk of its unquoted stock to Woodford Patient Capital Trust (WPCT) so that it could stay within its 10% limit. However, WPCT is now well over its own limit so can make no further investments in unquoted stocks.

With no obvious buyer, the alternative could be for the Equity Income Fund to devalue some of the unquoted holdings, albeit that would be slightly embarrassing if it related to any of the stock it has transferred over to WPCT recently and, of course, stocks would only be devalued pursuant to a disciplined valuation process taking into account the underlying performance of the business.

I guess all will become a lot clearer when the end-January portfolio is published, assuming of course it still plans to do so. I note that it has mentioned that it will no longer be proving monthly updates, which is understandable as that avoids the potential to tell everyone publicly that you’ve just bought a stock a matter of weeks before a massive profit warning and dividend cut a la Capita.

Bigger picture, the start of the year has been a horror show for Woodford with huge drops in the unit price of both the Equity Income Fund and the Income Focus Fund of 8-9% as well as a (slightly smaller) drop in NAV of WPCT. With a bad news story coming out most weeks, it wouldn’t be a great surprise to see more redemptions at the flagship fund. The unquoted issue only gets tougher to solve as redemptions increase and, also, the fund will have to sell some of its less liquid positions at some point too which could have significant price consequences. As this fund begins to look more and more like the WPCT as it gets smaller, I wouldn’t be surprised to see redemptions increase.

As well as these substantial issues at the main fund, the WPCT NAV has now dropped below 86p due to general weakness across all three of its only material quoted holdings, Prothena, Purplebricks and Theravance Biopharma. Debt must be close to being over 20% now and I have just realised from looking at Companies House that the lender actually has security for its overdraft (mea culpa) which could be an absolute calamity for WPCT should they call any of that in.  I have no idea what would enable the security to be called but, considering I estimate that about 100% of NAV is now in unquoted / illiquid / exposed to unquoted stocks and NAV is at an all-time low, I would be amazed if conversations were not ongoing.

However, if there is a 20% covenant, Woodford could always pay down a few million quid to stay under that by selling more of its quoted stocks so it is manageable in the short term not that that necessarily helps to improve the potential performance of WPCT.

I find it quite amusing that the Equity Income Fund has to find a way to reduce its unquoted valuations at a time when it would be beneficial for WPCT for those valuations to be higher to increase its NAV.

I await to see the January portfolio holdings with interest to see how Woodford has kept all the problems under control but I can’t help but feel that the moles may win this one!

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