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What does it mean when a fund is suspended? Woodford hits the brakes

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In a fall from grace that seems to be turning into a bottomless pit, popular investment The Woodford Equity Income Fund has had a terrible year. Due to a combo of poor performance and nervous investors leaving like lemmings, the fund has hit a downward spiral which has now resulted in suspension. But what exactly does suspension mean in investing terms? And how are investors being affected?

 

What does it mean for a fund to be suspended?

  • Nobody can buy the fund and nobody can sell it for a limited time.
  • This is to protect existing investors, not fund managers.
  • When available to sell again, the value of the fund may have dropped or risen.
  • This is a regulated activity in accordance with the Financial Conduct Authority.

 

Why do investment funds get suspended?

Fund suspension sometimes happens, albeit rarely, if a significant reduction in the size of the fund threatens the ability to run it effectively.

Let’s use Woodford as an example. Investors collectively had around £6.8 billion in the fund last year, but for various reasons – both valid and questionable – many investors have taken their money back. Plus, the fund has lost about 17% of its value due to Brexit and other reasons. Now it sits at £3.7 billion.

Think of this like dramatic weight loss with serious health implications. Christian Bale in American Hustle to Christian Bale in The Machinist. The body isn’t prepared for such a dramatic change, and neither is an investment fund. So, effectively, a suspension softens the blow and let’s things settle so the body or fund can adjust.

In investment terms, this means fund managers have more time to sell some investments to pay back investors who are leaving. And remaining investors feel the benefits of not being managed by a forced seller – the cardinal sin of the investing world. After all, if you rush to sell out at the wrong time, you tend to lose out too.

I’m invested in the Woodford Equity Income Fund… what should I do?

Well, there’s not much you can do – at least until the 28-day suspension is up for review. But for starters, don’t panic. Just because the fund is heading downhill at the moment, it doesn’t mean it can’t go back up again. Of course, the opposite is just as true: it could keep on falling and never recover. Nobody can know for sure.

But consider this: Woodford’s fund has still appeared on recommended fund lists all year despite the bad time it’s had, so the pros who compile the lists clearly have a degree of long-term faith in it. Only this week was it removed from Hargreaves Lansdown’s Wealth 50 list “as the fund can’t be traded”.

 

So, should you sell up straight away when the flood gates are opened again? That completely depends on your approach and your goals. All we suggest is you make an informed decision instead of just following the media frenzy.

To read more about what’s going on behind the scenes in your Woodford Equity Income fund, read Holly Mackay’s most recent Boring Money blog and Mark Dampier’s update from Hargreaves Lansdown.

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