Star fund manager exits can prove a blow to small caps

* Small caps seen vulnerable after Woodford leaves Invesco (NYSE: IVZ - news)

* Could take thousands of days to liquidate - Markit

* Analysts urge caution in tracking 'star' managers

By Tricia Wright

LONDON, Oct (KOSDAQ: 039200.KQ - news) 25 (Reuters) - Small companies favoured by top fund manager Neil Woodford risk steep sell-offs in the run-up to his departure from Invesco, underscoring the dangers for retail investors who track the views of such "stars".

Invesco Perpetual's announcement earlier this month that Woodford would leave in April - the latest high-profile fund industry departure - sparked price falls in both blue-chip and small-cap stocks that he holds.

Analysts say the sell-off is likely to accelerate as his departure date approaches, with most impact on small companies because his holdings represent a relatively large part of their market cap and investors won't want to be left holding shares that have lost their famous champion.

Outflows are likely simply because of Woodford's status, even if the new manager shares his world view. There were outflows from Schroders (LSE: SDR.L - news) earlier this year when equity fund manager Richard Buxton quit, while the departure of managers such as Roger Guy from Gartmore in 2011 was quickly followed by the loss of hefty amounts of client cash.

Such outflows may force a fund to sell some of its holdings to pay back the investors.

Woodford "might have big positions in the likes of GlaxoSmithKline (Other OTC: GLAXF - news) and companies like that - but they're big companies so they can absorb some of that impact (of a potential sale of holdings) much more easily," said Adrian Lowcock, a senior manager at investment management firm Hargreaves Lansdown (LSE: HL.L - news) .

"The issue... is really in the smaller caps, because he still has some quite strong positions in some small and mid-sized companies... If it became known that (the fund) was forced to sell them (to repay investors) that could create huge volatility."

Invesco is the largest or second largest shareholder in 22 of the 25 small cap companies Woodford holds, analysts at Markit said in a note. Daily trade in such shares is often numbered in the thousands rather than the millions traded in larger firms.

Markit said those small cap holdings would take "hundreds if not thousands" of trading days to completely liquidate. This suggests that if the shares are sold quickly, the price fall would be significant and much more pronounced than any losses in the share price of the blue-chip companies.

This would be likely to hit retail investors, who, in the uncertain environment of the financial crisis, have sought the perceived security of following successful managers like Woodford. He kept away from the dotcom bubble in the late 1990s and avoided banks before Lehman Brothers' collapse.

"We do get people phoning in and saying 'I notice so and so has exited their position entirely - what should we do? What's the 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, many investors use them as a guide for their own decisions even if they do not buy into the fund directly.

"There's one client who I speak to regularly... he will scour around and specifically look for companies where a particular hedge fund has a significant holding and that hedge fund has a good track record," Yusuf Heusen, trader at IG (LSE: IGG.L - news) , said.

Analysts stressed the need not to become fixated by a fund manager's reputation.

"Mostly people base their investment decisions on a perception of what feels like a good investment. This perception is often quite a different thing from a good investment itself," said Greg Davies, managing director and head of behavioural and quantitative finance at Barclays (LSE: BARC.L - news) .

"No matter how good a star manager is, by the time they've got this cult status, regardless of how well deserved,... cult status by its very nature is an excessive devotion to a name."

For further stories on the implications of Woodford's departure: