Interactive Investor

Liquidity and an analysis of Neil Woodford's AIM holdings

Woodford’s mess is a stark reminder of why investors must understand liquidity and how markets work.

14th June 2019 15:27

Andrew Hore from interactive investor

Our award-winning AIM writer uses Woodford's predicament as a stark reminder of why investors must understand liquidity and how share prices work. 

The suspension of withdrawals and investments at Woodford Equity Income highlights the importance of liquidity in share trading – how easy it is to buy and sell shares. Investment manager Neil Woodford's eponymous firm Woodford Investment Management has been hit by disappointing investments and investor confidence has waned. 

Investors wanted to remove their cash from the open-ended income fund, in particular Kent County Council's whole investment of around £263 million, although that value may have declined since then. That cash is not easy for fund managers to raise when many of the investments may have limited liquidity.

There is even talk that Woodford may lose the contract to manage the Woodford Patient Capital Trust (LSE:WPCT), which floated just over four years ago at 100p. The portfolio includes AIM-quoted companies such as RM2 (LSE:RM2), ReNeuron (LSE:RENE), Mereo BioPharma (LSE:MPH), Mercia Technologies (LSE:MERC), NetScientific (LSE:NSCI), Xeros (LSE:XSG) and Sensyne Health (LSE:SENS). It also included Halosource (LSE:HAL), which is being wound up.

There are companies in common with Woodford Equity Income Fund. For example, Nasdaq-listed Evofem Biosciences (NASDAQ:EVFM) is in both portfolios even though it does not appear to pay a dividend.

Woodford is not just suffering problems with its own funds. It had a contract to manage a £3.5 billion high income fund for St James's Place, which has decided to replace Woodford as manager with Columbia Threadneedle Asset Management and RWC Partners. 

When new managers come into a fund, they tend to assess which investments they want to keep and which they do not believe in and want to sell.

This is something that could affect at least 35 AIM companies where Woodford Investment Management has a stake of more than 3% in its funds.

In the case of pallets manufacturer RM2, Woodford has a majority stake following rescue fundraisings. Companies, such as RM2, have relied on Woodford providing backing in order to survive and continue with their strategies.

Long-term outlook

Woodford has made no secret that the investment strategy of his funds is long-term. Large stakes in companies were built up in quoted companies and in unquoted ones. In reality, a large stake in a quoted company can be almost as difficult to sell as a shareholding in an unquoted company.

The plus for a quoted company is that smaller parcels of shares can be sold over time. Even then, it can depend on how liquid the market is in the individual share. Many of the recent share sales by Woodford have been fully-listed companies, but some AIM company stakes have also been reduced.

Woodford is not just investing in Main Market and AIM companies in London though. It has been a major backer of NEX-quoted cancer therapy provider Proton Partners International Ltd (PPI), which trades on the NEX Exchange - often described as AIM's little brother. last week requested that Woodford Investment Management to subscribe for £25 million worth of shares at 176p a share. 

This was part of an agreement with Woodford that was outlined in the prospectus of the proton beam therapy provider when it floated. It appears that Proton was keen to enforce the subscription. In May, Proton raised £10 million at 176p a share by issuing shares to Woodford, which owns 45.6% of Proton.

Proton has been a part of the Woodford Patient Capital Trust portfolio since it was launched and it was 6.66% of net asset value (NAV) at the end of 2018, before the additional £35 million was invested – it is unclear whether the trust invested all the cash. It is likely to be more difficult to trade in a NEX-quoted company than an AIM-quoted one. The bid/offer spread is 210p to 245p and 155 shares were traded on 18 April at 245p each – the only deal since flotation. That cannot be described as liquid.

Bid/offer spreads

Looking at the bid/offer spreads in the table of Woodford's largest AIM stakes they do not seem particularly wide in the majority of cases. These are a snapshot at the end of one day’s trading, so they may change from day to day.

Of course, the bid/offer spreads quoted by market makers are for a specific size of transaction, probably for a few thousand shares and possibly as few as 500 shares. These prices have to be offered by market makers up to the quoted size. The bid and offer prices could change if a larger parcel of shares comes onto the market.

Market makers are not going to take large stakes onto their books unless they know who they are going to sell them on to. 

Woodford has not yet sold shares in many of his main AIM company investments. It is easier to sell when there is more liquidity. The table below shows the level of trading in each of the AIM investments during April.

Significant AIM stakes within Woodford portfolios
Company Ticker Bid price (p) Offer price (p) Mkt cap (£m) Latest stake %* Monthly deals** Monthly vol (£m)**
4d Pharma DDDD 91.00 95.50 61.10 26.74 150 2.61
Benchmark BMK 40.00 42.00 228.80 12.45 141 1.17
Brave Bison BBSN 1.40 1.45 8.60 18.70 1,020 2.65
Breedon BREE 69.00 70.40 1172.70 <5.00 887 14.83
Burford Capital BUR 1503.00 1506.00 3275.40 9.48 31,841 355.40
Circassia Pharma CIR 17.80 18.40 69.40 24.47 1,186 2.18
Crystal Amber CRS 214.00 218.00 207.10 17.11 57 0.61
Eddie Stobart Logistics ESL 71.00 72.00 271.20 25.00 649 8.16
e-Therapeutics ETX 1.70 1.90 4.80 14.11 40 0.07
eve Sleep EVE 5.75 6.00 15.30 46.79 162 1.10
GYG GYG 55.00 59.00 26.60 26.01 113 0.83
Horizon Discovery HZD 146.40 147.00 220.20 12.52 1,460 14.08
hVIVO HVO 19.00 20.00 16.20 29.15 177 1.03
Induction Healthcare INHC 117.00 122.00 35.40 14.67 na na
Itaconix ITX 2.50 2.60 6.90 33.00 144 0.27
Mercia Technologies MERC 32.00 34.00 101.90 24.70 152 0.65
Mereo BioPharma MPH 60.00 64.00 63.30 31.07 52 4.73
Midatech Pharma MTPH 6.30 6.70 26.60 19.00 1,109 4.40
Morses Club MCL 151.00 158.00 205.10 9.75 435 2.21
Netscientific NSCI 8.50 9.50 7.10 46.83 197 0.50
Oakley Capital Inv OCI 219.00 222.00 449.70 19.83 587 9.78
Purplebricks PURP 108.20 110.00 333.90 19.25 6,026 26.88
Redde REDD 103.80 104.60 329.20 19.86 5,158 27.48
ReNeuron RENE 230.00 240.00 73.10 35.39 4,417 26.84
RM2 RM2 39.00 40.00 15.90 63.70 59 0.34
Sensyne Health SENS 120.00 127.00 158.80 20.00 76 10.37
Silence Therapeutics SLN 44.00 45.80 32.20 4.80 375 1.01
Strix KETL 158.80 160.00 304.00 <5.00 2,891 13.05
Synairgen SNG 12.50 13.00 14.00 22.20 47 0.09
Time Out TMO 105.00 108.00 143.40 <5 73 0.44
Tissue Regenix TRX 5.50 5.70 65.60 26.23 132 0.30
Verseon Corporation VERS 40.00 44.00 67.00 24.80 25 0.79
Warehouse REIT WHR 104.50 105.50 251.10 5.00 1,076 6.96
Watkin Jones WJG 209.00 210.00 531.00 <5.00 4,614 21.44
Xeros Technology XSG 6.54 6.92 17.30 39.70 1,769 5.40
Prices as at 13 June 2019. *Stake in the company held by Woodford Investment Management  **London Stock Exchange data for April.

Woodford's stake sales

The Woodford funds owned more than 29% of estate agency Purplebricks (LSE:PURP) a couple of months ago and that has been reduced to 19.25%.

This comes at a time when the international businesses are performing poorly, and management has been changed. That is not an ideal scenario for selling shares, but Purplebricks is one of the more regularly traded AIM shares in the portfolios.

The stake in Redde (LSE:REDD) has been cut from 28% to 19.86%. However, like Purplebricks, the credit hire firm has put out a profit warning after it lost a major contract. In fact, the stake was edged up after the trading statement.

Woodford has cut its stakes in student accommodation developer Watkin Jones, aggregates supplier Breedon and Time Out to below 5%.

Time Out is interesting because it does not have a history of strong liquidity and Woodford had a 16.06% stake. Most days there is little or no trading in Time Out shares.

Invesco increased its stake from 11.9% to 15.5%. Non-executive chairman Peter Dubens has acquired a total of 300,000 shares at 95p each and 107p each, although it is not clear whether any of these came from Woodford. This suggests that if there are ready buyers a deal can be done.

Stakes in Circassia Pharmaceuticals (LSE:CIR) and e-Therapeutics (LSE:ETX) have been reduced even though liquidity is poor. Circassia is traded frequently – 1,186 trades in April – but the value traded is relatively small.

Litigation funder Burford Capital (LSE:BUR) is the largest AIM company and was the second-largest investment in the Woodford Equity Income Fund at the end of April 2019. 

It is reported that Burford has been 'shorted' (a bet that the shares will go down) by Gladstone Capital in anticipation of any possible disposal by Woodford. The total stake is worth more than £300 million, which is less than the value of shares traded in an individual month. Most of the other AIM stakes are many times the value of a single month of trading. The Burford bid/offer spread is 0.2%.

Source: TradingView  Past performance is not a guide to future performance

There have been no indications that Burford shares have been sold by Woodford. The share price has fallen in the past couple of months, although that happened before the problems at Woodford reached a head. There was a recovery, which appears to have been reversed in the past couple of weeks. 

Looking down the AIM stakes, it appears that very few have generated much in the way of good news in recent weeks. Induction Healthcare (LSE:INHC) has settled at a small premium to its placing price.

Private investors

Private investors do not have the problem of owning a large percentage stake in an individual company, but the underlying problems with liquidity are something that should be taken into account when buying and selling shares. 

Although the AIM market is viewed as less liquid than the Main Market, it really depends on the individual share. Some AIM companies, such as Burford, are on the SETS electronic order book which can help to reduce spreads. 

The larger AIM companies, such as Burford and online fashion retailer ASOS (LSE:ASC), can tend to be more liquid, but this is not always the case.

There are some large companies that are rarely traded and small ones that attract investor attention and are regularly traded. Size is not always a good way to judge liquidity.

Any investment decision needs to take into account the bid/offer spread and how often the shares are traded. A wide bid/offer spread plus low trading volumes means that a longer-term view needs to be taken, because there is no guarantee that the shares can be easily traded.

Liquidity, though, can change over time. When shares are acquired the market might be highly liquid, but this is not guaranteed for ever. Trading disappointments or just a lack of interest can mean that liquidity declines and bid/offer spreads widen. 

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.

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