NOT AGAIN !

Am I having a deja vu? Have we all seen this before? Of course we have! For those of us who have been around the block a few times, this is not the first time a Fund Manager has fallen foul of liquidity issues following a period of underperformance, market corrections or other ‘stuff’ going on in their lives.

So Neil Woodford’s Equity Income Fund has been suspended after significant redemptions over the last few months. Downgrades, large institutional redemptions and generally people changing their investment cycle from 5 years to 5 months have caused Mr Woodford to halt any redemptions from the fund. But why is this happening and why does it keep on happening? 

Let me say that for the record, I actually respect Neil Woodford as an investor and I like his investment style. I worked with him many moons ago and we did not get on, that’s for sure, and to be honest I didn’t really care for him. However his track record speaks for itself but value has been out of favour for some years and he will have bad years and some excellent years over a normal investment cycle. 

I have read a number of comments online from journalists and commentators who seem to get it, although the BBC lunchtime news journalist must have smoked some wacky-baccy before she went on air, as she came out with some absolute drivel about Mr Woodford’s personality. What on earth has his personality got to do with this? She even described his physique. I’ve met Neil many times and I remember his views not his torso! The press are having a field day; just like red kites over the Oxfordshire fields they are looking for carrion and oh boy, have they found a big old deer?! So are the press to blame? In some respects they are, as they have fanned the flames and many investors, nervous due to performance, will have taken flight. However, my issue isn’t with the press or other commentators who have come out of the woodwork to state how they, “always knew this was going to happen”. (Congratulations on your new “Superpower” by the way…..Hindsight!)

No; my issue is with the industry overall. As long as I can remember the people that look after funds, either administrators, custodians, boards or management companies, have a sole duty – to protect investors and to ensure the fund they have invested in is run as described in the prospectus. I am not saying that in Woodford’s case this wasn’t done, but as an industry we are asking investors to put their trust in the investments we have either advised or promoted to them. In this instance the trust issue has been shot to pieces and the repercussions are widespread for the fund’s industry as a whole. Investors who invest in a liquid investment vehicle such as Woodford’s should expect it to be completely liquid but once again the focus is on the illiquid assets. 

We had this with Peter Young at Deutsche (1996/7) and Rory Powe (2000/2001) when he was at Invesco, albeit Peter Young did have some other issues going on at the same time. The market turns against them and ‘hey presto’, no one wants to buy the stock and your performance starts to turn and then we have what’s resulted today. Panic. Some would argue that investors have Prospectus and KIIDS to review but let’s be honest, they don’t always read them, and they expect advisers etc to do the heavy lifting. But are advisers going to explain that the Fund has 10% in illiquid assets and that in the perfect storm you may not get back what you expect as every other investor bails? Unlikely. 

Instead let’s stop illiquid assets being part of the conversation and in open-ended funds. I know some would argue they have a place and many managers I talk to say they are perfectly fine, but once again we poor sods who work around managers are the ones picking up the pieces when it goes wrong. The easiest thing is for the regulations to change for UCITS to stop illiquids, full stop. Stock-picking is an art they say, although I believe it’s more of a science these days, so let’s get scientific and change the formulae for UCITS.

Within our own business we have our own risk metrics and we measure liquidity all the time and stress-test the portfolios of all our managers. We ask them and get evidence of how long it would take them to liquidate their portfolios. We cross check this with our own risk team so that we can feel comfortable as a board that we are on top of liquidity. Assets in portfolios are liquid until the day someone says they no longer want them but with fully quoted assets that can’t happen. You may not get a great price but at least you get your cash out. These are eligible assets but I am not a believer that illiquid assets are eligible, although the legislation allows up to 10%. So in future let’s put pressure on managers and legislators to change this. Then we can get back to doing what we should all be doing right now, focussing on performance, price and asset allocation. That way we can at least sleep at night without worrying that our fund manager may have bought some dodgy small private equity stock whilst we weren’t looking.

Have a more relaxing week,

Stuart Alexander

CEO

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