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* Small caps seen vulnerable after Woodford leaves Invesco
* Could take thousands of days to liquidate - Markit
* Analysts urge caution in tracking 'star' managers
By Tricia Wright
LONDON, Oct 25 (Reuters) - Small companies favoured by topfund manager Neil Woodford risk steep sell-offs in the run-up tohis departure from Invesco, underscoring the dangers for retailinvestors who track the views of such "stars".
Invesco Perpetual's announcement earlier this month thatWoodford would leave in April - the latest high-profile fundindustry departure - sparked price falls in both blue-chip andsmall-cap stocks that he holds.
Analysts say the sell-off is likely to accelerate as hisdeparture date approaches, with most impact on small companiesbecause his holdings represent a relatively large part of theirmarket cap and investors won't want to be left holding sharesthat have lost their famous champion.
Outflows are likely simply because of Woodford's status,even if the new manager shares his world view. There wereoutflows from Schroders earlier this year when equityfund manager Richard Buxton quit, while the departure ofmanagers such as Roger Guy from Gartmore in 2011 was quicklyfollowed by the loss of hefty amounts of client cash.
Such outflows may force a fund to sell some of its holdingsto pay back the investors.
Woodford "might have big positions in the likes ofGlaxoSmithKline and companies like that - but they'rebig companies so they can absorb some of that impact (of apotential sale of holdings) much more easily," said AdrianLowcock, a senior manager at investment management firmHargreaves Lansdown.
"The issue... is really in the smaller caps, because hestill has some quite strong positions in some small andmid-sized companies... If it became known that (the fund) wasforced to sell them (to repay investors) that could create hugevolatility."
Invesco is the largest or second largest shareholder in 22of the 25 small cap companies Woodford holds, analysts at Markitsaid in a note. Daily trade in such shares is often numbered inthe thousands rather than the millions traded in larger firms.
Markit said those small cap holdings would take "hundreds ifnot thousands" of trading days to completely liquidate. Thissuggests that if the shares are sold quickly, the price fallwould be significant and much more pronounced than any losses inthe share price of the blue-chip companies.
This would be likely to hit retail investors, who, in theuncertain environment of the financial crisis, have sought theperceived security of following successful managers likeWoodford. He kept away from the dotcom bubble in the late 1990sand avoided banks before Lehman Brothers' collapse.
"We do get people phoning in and saying 'I notice so and sohas exited their position entirely - what should we do? What'sthe view? What's the reason for them doing that sort of thing?'"Sam Petts, partner at stockbroker Killik & Co, said.
With funds' holdings publicised and widely available, manyinvestors use them as a guide for their own decisions even ifthey do not buy into the fund directly.
"There's one client who I speak to regularly... he willscour around and specifically look for companies where aparticular hedge fund has a significant holding and that hedgefund has a good track record," Yusuf Heusen, trader at IG, said.
Analysts stressed the need not to become fixated by a fundmanager's reputation.
"Mostly people base their investment decisions on aperception of what feels like a good investment. This perceptionis often quite a different thing from a good investment itself,"said Greg Davies, managing director and head of behavioural andquantitative finance at Barclays.
"No matter how good a star manager is, by the time they'vegot this cult status, regardless of how well deserved,... cultstatus by its very nature is an excessive devotion to a name."
For further stories on the implications of Woodford'sdeparture:
