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A British Fund Star’s Fall Shows the Peril of Illiquid Holdings

The crisis at Woodford Equity Income holds lessons for investors everywhere.
Neil Woodford

Neil Woodford

Photographer: Finn Taylor
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Neil Woodford is a famous fund manager in the United Kingdom. At a time when individual investors are pouring money into anonymously run index funds, there aren’t many of those left anywhere in the world. He now faces a crisis after he froze investors’ redemptions in his flagship U.K. fund, LF Woodford Equity Income, which has fallen about 22% in the past year. The freeze—a rare step for a fund aimed at ordinary investors—is supposed to buy him time to offload a bunch of “unquoted and less liquid” stocks in the fund’s portfolio, according to his firm’s website.

It’s a dramatic reversal of fortune for Woodford, a Warren Buffett devotee who built up a cult following by correctly calling major swings in technology, tobacco, and other stocks over decades. And fund investors everywhere, including in the U.S., can take away several important lessons from his flameout, financial advisers say. It points to the potential hazards of funds that invest in obscure, hard-to-sell assets—a rising concern that emerged again on June 19 when the fund researcher Morningstar raised questions about holdings in a fund managed by an affiliate of the French bank Natixis SA. And it shows the need for a healthy skepticism about celebrated money managers.