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UPDATE 2-Frozen Woodford fund breaches regulatory cap after Guernsey delistings

Carolyn Cohn and Simon Jessop

delistings@

* Sabina, Ombu remain listed on Guernsey exchange

* Fund has six months to return below cap

* Woodford's listed fund hovering above record lows (Adds detail, background, WPCT shares)

LONDON, July 31 (Reuters) - Neil Woodford's suspended Equity Income Fund has breached a 10% cap on unlisted stocks after two of its holdings delisted from the Guernsey exchange, a spokesman said on Wednesday, adding that it was taking action to remedy the situation.

British asset manager Woodford is facing the wrath of regulators, lawmakers and investors after his eponymous 3.7 billion pound ($4.5 billion) flagship fund was frozen on June 3 because it could not meet client redemption requests.

Woodford is trying to adjust his portfolio by selling illiquid assets to raise cash to reopen the fund, which its administrator said this week is likely to remain shut until early December.

The retail-targeted fund has been criticized by Britain's markets watchdog for "sailing close to the wind" with its heavy investment in illiquid stocks, including companies which are listed on the Guernsey exchange but not traded.

IH Holdings and BenevolentAI issued statements on Tuesday via the TISE exchange saying they were canceling their shares, thereby causing Woodford's fund to breach the 10% rule.

"Following the inadvertent passive breach, action to bring the fund back into compliance is already underway," the Woodford spokesman said in an emailed statement.

"The decision by Benevolent AI and Industrial Heat to delist from TISE will have no impact in how the assets are managed within the fund," the spokesman added.

The Financial Conduct Authority (FCA) allows funds six months to move portfolios back into compliance if they breach the cap, although previous breaches by the fund were settled more quickly, within a timeframe agreed with the regulator.

The FCA declined to comment on the breach.

In addition to 10% of its holdings in unlisted stocks, Woodford had around another 10% in the Guernsey-listed firms, which did not technically breach the rules.

Woodford, which is no longer publishing holdings data, had 4.5% of its portfolio in BenevolentAI and 2.5% in IH Group at the end of April, previous filings show.

The fund has two other Guernsey-listed holdings, Sabina Estates and Ombu.

Shares in Woodford's only listed fund, Woodford Patient Capital Trust were up 1.3% after hitting record lows this week. WPCT, which also holds a high proportion of illiquid assets, said on Monday it may fire Neil Woodford as its manager. ($1 = 0.8218 pounds) (Additional reporting by Huw Jones, editing by Alexander Smith)