Morningstar has downgraded a hedge fund facing liquidity issues. The move follows a sombre apology to investors from the fund manager delivered via YouTube.
Neil Woodford issued a YouTube apology to investors whose money is currently frozen in Woodford Investment Management's Woodford Equity Income Fund, but the apology didn't help the fund avoid a Morningstar downgrade.
Morningstar analysts yesterday downgraded the Woodford Equity Income fund to a 'Negative' rating.
The downgrade comes as Woodford suspended trading amidst a flood of investor redemptions.
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Woodford uploaded a YouTube video issuing an apology to investors, in which he said: "The situation that we were confronted with was that we were seeing a lot of outflow in the portfolio, as a result of that increased level of redemptions what we were seeing was the stock market anticipating that we would have to be selling stocks to meet those redemptions."
Despite this, his strategy will remain the same and the fund will continue to work for investors while there are no inflows or outflows, saying the suspension will provide time for him to execute the strategy.
Woodford said: "That strategy is about reducing the fund's exposure to illiquids and unquoteds, down to zero. That process was underway and is continuing, but was made much more difficult by the outflow that we were witnessing."
The strategy will see the fund reduce exposure to illiquid, off-market investments and Woodford said capital will be redeployed into "more conventional" stocks in the FTSE 350.
"I'm incredibly sorry that we've had to take this decision. We will keep our investors informed. We will use this time to reposition the fund in the way that we said. We understand our investors' frustration," Woodford said.
The comments under Woodford's apology were unforgiving.
One comment reads: "A bad trade-off between luck, skill and hubris. So he's been selling off the most liquid stocks first and now he's left with the illiquid off-market stuff. Unlikely (but not impossible) he will turn this around."
Another stated: "Too many illiquid and unquoted stocks - Neil Woodford needs to read Warren Buffett's annual letter to shareholders."
Many of the comments noted that Hargreaves Lansdown, a UK financial services company which sells investment products to retail investors, had promoted the Woodford Equity Income Fund.
Hargreaves Lansdown issued a response yesterday, in which it said: "We understand the last week has been unsettling. News that dealing in Woodford Equity Income has been suspended will be concerning to the investors that have backed this fund, ourselves included."
The company said it had been engaged with Woodford for "some time" about the number of unquoted and hard-to-trade stocks in the portfolio.
Ending the statement on an upbeat note, the company said: "While we don't underestimate the impact of two years' bad performance, we are advocates of long-term investing. Over the last 10 years, Woodford has doubled investors' money, even after the recent falls."
UK wealth giant St James's Place terminated its mandate with Woodford Investment Management earlier in the week. Woodford had run the firm's UK High Income Unit Trust, Income Distribution, and SJPI UK High Income funds, with assets totalling £3.5 billion.