The meltdown of high-profile investment fund Woodford Equity Income has become every investor’s nightmare scenario. More than 300,000 investors have been forced to expect more than four years to be compensated for the losses they suffered ever since shares in the £3.4 billion fund – managed by former City star Neil Woodford – were suspended.
The fund was wound down in 2019 after a big institutional client couldn’t get its hands on the money it had invested. And in recent months, a raft of new investment fund closures have been announced among heavyweight investment shops.
Volatile markets have derailed the investments of even the most experienced money managers, forcing asset managers to call time on their multi-million pound ventures. From rocky markets to poor investment strategies and even allegations of gross misconduct, investors have been given a range of reasons for being left high and dry.
A fortnight ago, asset management giant BlackRock announced it would wind down its £55.3 million Aquila Emerging Markets fund due to low investor interest and poor performance.
It follows the £159.6 million Blackstone Diversified Multi-Strategy fund which went into liquidation after assets dropped by nearly 90 per cent in four years. In October, one of Britain’s oldest hedge fund shops, Odey Asset Management, announced it was closing its doors in the wake of sexual misconduct allegations made against its founder Crispin Odey.
![Long wait: Investors in the axed income fund run by Neil Woodford, pictured left, have been waiting for four years to receive compensation](https://topnews.media/wp-content/uploads/2023/12/78502291-12817517-image-m-86_1701529888971.jpg)
Long expect: Investors in the axed income fund run by Neil Woodford, pictured left, have been waiting for four years to acquire compensation
So what happens to your investment if a fund decides to shut up shop? Here, we explain exactly what happens when a fund goes into liquidation – and whether your money will be safe.
MY FUND IS FOLDING – WHAT HAPPENS NEXT?
When a fund liquidates it is removed from sale, sells off all of its assets and distributes the proceeds to its shareholders. It typically takes a couple of weeks for investors to acquire their money but there is no assure they will be fully reimbursed.
If a fund is wound down then shareholders are forced to sell their investments at a time that is not of their choosing, which can mean that they suffer heavy losses. In the case of Neil Woodford’s Equity Income fund, investors have faced a four-year expect but could acquire up to 77 per cent of their money back. They are unlikely to acquire it until early next year.
Your investment platform should notify you if your fund is set to close and will give you options for what you want to do with your money.
Often asset management companies will give shareholders the choice between redeeming their money or investing it in another of the company’s funds, which is known as a rollover.
‘Fund management groups will usually offer one of its own funds as an alternative for investors to consider in an attempt to keep them,’ says Kyle Caldwell, of investment platform Interactive Investor.
‘This is particularly the case with big fund management companies that have dozens of actively managed or market tracking funds. A smaller firm, however, may not have a suitable alternative.’
The same general process applies to investment trusts but some also have continuation votes, where shareholders have a say.
If investors vote to wind up the trust, shareholders are paid their share of the company’s assets at or near their net asset value, which is the value of trust’s assets minus its total liabilities.
WHAT’S MY BEST advance?
If a fund you invest in is being wound down, it may be tempting to jump ship early by selling your holding but this could be a costly mistake, warns Laith Khalaf, of investment platform AJ Bell.
‘If the fund is trading at a substantial discount you may benefit by waiting for the assets to be sold and the cash returned, as this could well be done at a price nearer to the net asset value,’ he says.
Savers should avoid any knee-jerk reactions and rushing to pick another investment, he adds.
‘Look for a trust or fund with a similar investment strategy if you want to stay invested in the same area, and also pay attention to the pedigree of the manager and the fees that are charged,’ he says.
WHAT MAKES A FUND SHUT?
There are a number of reasons why funds are shut down, says Annabel Brodie-Smith, from the Association of Investment Companies. ‘For example, investors may no longer want to back the fund’s strategy if markets turn, the performance record may be poor, or the fund may be too small and will struggle to attract investors,’ she says.
Even high-profile funds and investment trusts are not safe. Last year, the £319 million Fundsmith Emerging Equities Trust voluntarily closed after its investment returns fell short of expectations.
Downward trends in certain types of investments can also direct to a spate of closures across the market. Property funds have come under increasing pressure, due to a sharp rise in interest rates.
Asset manager M&G International announced it would close its market-leading £565 million M&G Property Portfolio fund last month due to ‘a lack of demand’ in recent years. The advance follows Aegon and Aviva, which have already started to wind down their property funds.
MY FUND IS MERGING – WHAT DOES THAT MEAN?
In nine out of ten cases, funds are merged instead of going into liquidation, according to Jason Hollands of stockbroker Bestinvest. Mergers usually take place when there are overlapping investment strategies across two funds or the same management team works on both.
When funds are merged, the assets of two or more funds are combined to create a new scheme and there may be a shift in the investment strategy. Before the merger is completed you will be given the option of redeeming your investment or remaining invested. Those who don’t act will automatically have their money invested in the merged fund.
Among those set to merge in the coming weeks are the JP Morgan UK Smaller Companies and Mid Cap investment trusts, which will become JP Morgan UK Small Cap Growth & Income.
WILL I HAVE TO PAY ANY TAX IF MY FUND SHUTS?
If you hold a fund outside of a self-invested personal pension (Sipp) or Isa and it goes into liquidation then you may have to pay capital gains tax on any money you acquire if you have made a profit.
The first £6,000 of profit that you earn from a fund and £3,000 profit from a trust is tax-free.
Any profit above this will result in a tax bill at your marginal rate. If your taxable gain plus your total taxable income fall within the basic income tax band of £12,571 to £50,270, the capital gains tax rate is ten per cent. Higher and additional rate taxpayers are charged 20 per cent.
If you have made a loss, you can usually use it to offset capital gains you have made elsewhere.
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