Is your fund on the verge of being wound up? Here’s how to salvage your investment

The collapse of high-profile investment fund Woodford Equity Income has become every investor's nightmare scenario.

More than 300,000 investors have been forced to wait more than four years for compensation for the losses they have suffered 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 large institutional client was unable to obtain the money invested. And in recent months, a series of new mutual fund closures have been announced among major investment shops.

Volatile markets have derailed the investments of even the most experienced money managers, forcing asset managers to spend time on their multi-million dollar projects.

From shaky markets to poor investment strategies and even allegations of gross misconduct, investors have been given a slew of reasons to stay in the dark.

Two weeks ago, asset management giant BlackRock announced it would wind down its £55.3m Aquila Emerging Markets fund due to low investor interest and poor performance.

It follows the £159.6m Blackstone Diversified Multi-Strategy fund which collapsed after assets fell by almost 90 per cent in four years.

In October, one of Britain's oldest hedge fund shops, Odey Asset Management, announced it would close its doors following allegations of sexual misconduct against founder Crispin Odey.

So what happens to your investment if a fund decides to remain silent? Here we explain exactly what happens if a fund goes bankrupt – and whether your money is safe.

MY FUND FOLDS – WHAT HAPPENS NEXT?

When a fund liquidates, it is liquidated, sells all its assets and distributes the proceeds to its shareholders. It usually takes a few weeks for investors to receive their money, but there is no guarantee they will be fully repaid.

If a fund is wound down, shareholders are forced to sell their investments at a time they do not want, which could mean suffering heavy losses.

In the case of Neil Woodford's Equity Income fund, investors had to wait four years but could get up to 77 percent of their money back. It's unlikely they'll receive it until early next year.

Your investment platform should notify you if your fund is about to close and give you options for what to do with your money.

Often, asset managers give shareholders the choice between paying back their money or investing in another fund of the company, which is known as a rollover.

“Fund management groups will typically offer one of their own funds as an alternative for investors to try and hold,” says Kyle Caldwell of investment platform Interactive Investor.

'This is especially the case with large fund management firms that have dozens of actively managed or market-following funds. However, a smaller company 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 dissolve the trust, shareholders will receive their share of the company's assets at or near their net asset value, which is the value of the trust's assets minus its total liabilities.

WHAT IS MY BEST MOVE?

If a fund you are invested in is being wound down, it may be tempting to jump ship early by selling your stake, but this could be a costly mistake, warns Laith Khalaf of investment platform AJ Bell.

“If the fund is trading at a significant discount, you can benefit by waiting for the assets to be sold and the money returned, as this could very well happen at a price closer to net asset value,” he says.

Savers should avoid any knee-jerk reaction and rush to choose 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 look at the pedigree of the manager and the fees charged,” he says.

WHAT MAKES A FUND CLOSED?

There are a number of reasons why funds close, says Annabel Brodie-Smith of the Association of Investment Companies. “For example, investors may no longer want to support the fund's strategy if markets turn, if performance is poor, or if the fund is too small and will struggle to attract investors,” she says.

Even high-profile funds and investment trusts are not safe. Last year, the £319m Fundsmith Emerging Equities Trust was voluntarily closed after investment returns fell short of expectations.

Downward trends in certain types of investments can also lead to a wave of market-wide closings. Real estate funds are increasingly under pressure due to sharply increased interest rates.

Asset manager M&G International announced last month that it would close its market-leading £565m M&G Property Portfolio fund due to 'a lack of demand' in recent years. This move follows Aegon and Aviva, who have already started phasing out their real estate funds.

MY FUND IS MERGER – WHAT DOES THAT MEAN?

According to Jason Hollands of stockbroker Bestinvest, in nine out of ten cases, funds are merged instead of going bankrupt. Mergers usually occur when there are overlapping investment strategies for two funds or when the same management team works on both funds.

When funds are merged, the assets of two or more funds are combined to create a new plan and a shift in investment strategy may occur. Before the merger is completed, you will have the option to redeem your investment or remain invested. Those who do nothing will automatically invest their money 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.

DO I HAVE TO PAY TAXES IF MY FUND CLOSES?

If you hold a fund outside a self-invested personal pension (Sipp) or Isa and this fund is liquidated, you may have to pay capital gains tax on the money you receive if you have made a profit.

The first €6,000 of profits you earn from a fund and €3,000 of profits from a trust are tax-free.

Any profit above that will result in a tax bill at your marginal rate. If your taxable profits plus your total taxable income fall within the basic income tax range of £12,571 to £50,270, the capital gains tax rate is ten percent. Taxpayers with a higher and additional rate pay 20 percent.

If you have suffered a loss, you can usually use this to offset the capital gains you have made elsewhere.