Voting on the LF Equity Income Fund Settlement Scheme
Flipping Correlation
Investors who held shares in the former LF Woodford Equity Income Fund (WEIF) at the time of the Suspension Date of the fund, namely in June 2019, are now given the option of voting to set up a Fund Settlement Scheme.
Investors can cast their vote on the online voting portal located at lfwoodfordfundscheme.com, and the deadline for voting is 4 December 2023.
However, as shown in the below chart, what was unusual in 2022 compared to previous episodes, was that the loss on the portfolio would have been due to a combination of Gilts sharply falling in price (yields rising), and UK equities also underperforming at the same time. The two asset classes showing a strong positive correlation, in other words moving in the same direction i.e., down, for the first time in 20 years. By contrast, the rationale of creating a traditional 60/40 portfolio is based on the expectation of a negative correlation between equity and Gilts. This simply means these two asset classes going in opposite direction; bonds doing well when equity struggles and vice versa, thus compensating each other, at least to a certain degree. This is what financial history suggests.
For instance, looking at previous episodes such as 2008 at the time of the Global Financial Crisis, the almost 30% fall in the FTSE All Share index in that calendar year would have been mitigated (to an extent) by the 15% return on the Gilts component of the portfolio. The same negative correlation happened in 2018 and 2020.
It appears 2022 was exceptional in this regard.
What is the LF Equity Income Fund Settlement Scheme?
Link Fund Solution Limited (LFSL) is the independent Authorised Corporate Director (ACD) of the LF Equity Income fund, formerly known as the LF Woodford Equity Income Fund.
LFSL wishes to offer to settle all and any potential claims that investors holding shares in the LF Woodford Equity Income Fund as of June 2019 might have. It proposes to do so by setting up a Fund Settlement Scheme.
A Scheme is simply an agreement between a company and its creditors (known as “Scheme Creditors”). This specific scheme will be set up if:
1) Approved by a majority in number (that is more than 50%), representing 75% or more in value, of the creditors who vote.
2) The Court approves the Scheme at a Court hearing.
In the Settlement, a fund of up to £230 million (the Settlement Fund) will be made available to share proportionally amongst relevant investors (“Scheme Creditors”) according to the number and class of shares they hold in the former LF Woodford Equity Income Fund, to be distributed in the same manner as capital distributions have been made since the Suspension Date.
Advantages of the Scheme
The main advantages for investors of voting in favour of setting up the scheme, appears to be as follows:
1) The initial distributions from the Settlement Fund are expected to be made in the first quarter of 2024 and are expected to total between £183.5 million and £200 million. Additional payments are also expected to be made as soon as possible.
2) The Scheme provides a convenient and streamlined process for making payments to relevant investors as they will not need to bring any litigation, complete any paperwork, or carry out any other steps to receive payment from the Settlement Fund, except where the WEIF is dissolved or it is otherwise not possible to make distributions through the WEIF, in which case other provisions will apply.
3) Relevant investors will be treated equally in that they will each receive the same percentage payment because the Settlement Fund will be shared proportionally amongst relevant investors according to the number and class of shares they hold in the former LF Woodford Equity Income Fund.
Disadvantages of the Scheme
The main disadvantages for investors of voting in favour of setting up the scheme, appears to be as follows:
1) The Settlement Fund will be less than the Financial Conduct Authority Total Amount. The maximum amount of the Settlement Fund is approximately 77% of the Financial Conduct Authority Total Amount. This means that the maximum possible amount of the Settlement Fund is £230 million, which is approximately 77% of the amount which the Financial Conduct Authority (FCA) claims was the loss incurred by investors who continued to hold shares in the former LF Woodford Equity Income Fund on and after the Suspension Date (being £298,403,919, known as the FCA Total Amount).
2) Scheme Creditors will no longer be able to bring certain claims against LFSL, the Parent and its subsidiaries (and each of their directors, partners and employees, advisers and officers) in relation to the former LF Woodford Equity Income Fund.
3) If the Scheme goes ahead, Scheme Creditors will not be able to pursue the Scheme Claims released in the Scheme against the Financial Services Compensation Scheme (FSCS).
What Happens if the Scheme does not go Ahead?
If the Scheme does not go ahead, LFSL will not accept any liability to Scheme Creditors. LFSL instead intends to defend itself against any claims made against it in relation to the former LF Woodford Equity Income Fund.
In the absence of the Scheme, a Scheme Creditor may be able to obtain compensation from the FSCS for up to £85,000 if it is able to demonstrate that it has a valid claim and is otherwise eligible. However, even If the FSCS accepts a claim, and this is not guaranteed, it may take longer to receive a payment from the FSCS than the time frame for receiving a payment in the Scheme.
What is the KLO Financial Services View?
We believe that it is likely that first payments will be made much earlier with the Scheme than without it (because Scheme Creditors will not need to bring litigation claims successfully or have the benefit of any other final judgment to be made), therefore we think it would be in the investors’ interest to vote in favour of setting up the LF Equity Income Fund Settlement Scheme.
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Disclaimer
Any research is for information purposes only and does not constitute financial advice. The value of investments and any income from them may go down as well as up, so you may get back less than you invested. Past performance cannot be relied upon as a guide to future performance. KLO Financial Services Ltd are registered in the UK, company number 08711328. We are authorised and regulated by the Financial Conduct Authority, reference 710272. For any information please visit our website www.klofinancialservices.com