Woodford Investment Management has responded to questions about the way it is managing the liquidity of its £4.6bn Equity Income fund through a period of underperformance.
The fund has shrunk in size from a peak of £10.2bn to £4.6bn at the end of February.
The shrinkage can partly be attributed to the decline in performance, with the fund losing 3 per cent over the past year.
But Neil Woodford's recent decision to sell some of the less liquid, unquoted, shares in the Equity Income fund portfolio to the Patient Capital investment trust, prompted some to question whether the need to meet outflows from investors was behind this move.
However a spokesman for Woodford IM insisted recent moves were to position the fund "towards profoundly undervalued companies".
Mr Woodford transferred £72.9m of unquoted shares from the Woodford Equity Income fund to the Patient Capital investment trust on March 1 in exchange for shares in the Patient Capital trust.
Patient Capital trust shares are listed on the stock market, so by effectively swapping them for unquoted holdings, the overall liquidity of both the trust and the Equity Income fund increased.
Darius McDermott, managing director at Chelsea Financial Services, said he had already downgraded the Woodford fund to a "hold" rating a year ago, on the basis that the fund's concentration on mid and small cap shares might be an issue if outflows persisted.
Such shares are typically harder to sell in big blocks and often mean accepting a lower price than market price.
Among the shares sold last year were BT and British American Tobacco, both companies that have had significant share price declines over the past year.
Brian Dennehy, managing director at Fundexpert.co.uk, said he was concerned smaller companies was not the area where Mr Woodford has forged his considerable reputation as an investor.
He therefore hasn't urged clients to buy the Woodford Equity Income fund since launch.
But Mr McDermott said he understood the rationale for Mr Woodford owning the shares he does right now.
He said: "Neil's reputation is based on his ability around understanding the economy, so if you buy Neil's view of the economy, that shares exposed to the UK economy are undervalued, then the logical place to be is in the FTSE 250 and below."
In fact, Mr Woodford already told investors in 2016 he would be focusing on small and mid caps, as the fund manager took the view that these were the best investments.
But Mr Woodford has not been buying solely small cap assets.
In 2018 he purchased £1.8bn of shares, this included £200m spent on the shares of FTSE 100 listed Barratt Developments, and £100m on FTSE 100 listed Imperial Brands, and Barratt Homes, which are the largest two holdings in the fund right now.
When asked if Mr Woodford's recent actions were down to liquidity concerns, a representative of Woodford Investment Management said: "Neil remains focused on capturing the opportunity that exists in the few parts of the market that have been left behind.
"He has positioned the portfolio to have a strong but selective bias towards profoundly undervalued companies, many of which are exposed to the UK economy.
"Elsewhere, the portfolio is positioned to capture the long-term opportunity across a range of earlier-stage businesses exposed to healthcare innovation and disruptive technology more broadly."
The controversy around Mr Woodford's latest deal centred on the price of the unquoted holdings which were paid for with shares in the Patient Capital trust.
Analysts at JP Morgan Cazenove said they would be "surprised if investors in the equity income fund" were happy with this deal as they have paid the net asset value price for the shares in Patient Capital Trust, despite the shares trading at a substantial discount to that price.
Woodford Investment Management responded to this criticism by saying the cost of buying the shares at the discounted price in the open market, even at the lower price, would have been higher than paying the net asset value price.
david.thorpe@ft.com
