Opinion  

Woodford launch raises need for in specie transfers

John Kenchington

Neil Woodford’s decision to quit Invesco Perpetual and launch his own asset manager has given rise to an interesting debate in industry circles.

He plans effectively to replicate the two giant UK equity income portfolios he ran at Invesco when he launches his CF Woodford Equity Income fund.

It will certainly be the biggest launch in UK retail history and much of the demand may come from many of Mr Woodford’s long-term followers who are biding their time in his old Invesco funds.

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During the offer period – from June 2 to June 19 – those clients will start pulling out of the Invesco funds, forcing the funds to sell holdings back to the markets to facilitate the redemptions. Simultaneously, the clients will switch their money to Mr Woodford’s new fund, forcing it to go to the market to buy up a portfolio of those same holdings.

This gives rise to vast trading costs due to all the buying and selling. Funds on both sides also risk moving markets against themselves as they trade, and investors will be out of the market for days, if not weeks, as they wait for the new fund to launch and for Mr Woodford to get it invested.

Mark Barnett, who has taken over Mr Woodford’s old funds, could also struggle to sell his less liquid ‘unquoted’ holdings quickly enough to match investors’ exits, potentially forcing him to fire sale assets to avoid breaching Ucits rules.

The answer is for Invesco to sell portfolio assets directly from its two funds to Mr Woodford’s new fund.

UK broking giant Hargreaves Lansdown has called for such an in specie asset transfer to take place in aggregate for all of its clients that want to make the switch, and other major investors are also understood to have a keen interest in the issue.

But Invesco is declining to facilitate these transfers.

To my mind there’s nothing really in it for Invesco to invest resources in making the transfers possible. I also gather that senior people at Invesco have told clients the benefits of in specie transfers are not as clear cut as it appears, and that may be right.

But the issue still reminds me of the old problem in the mobile phone industry when transferring between providers, while keeping your old number, could take several days. In that case Ofcom eventually weighed in and enforced a mandatory one-working-day switching period, forcing the phone companies to invest in enabling customers to switch more freely.

I don’t believe the technical hurdles of making in specie transfers work for investors would be insurmountable if the industry as a whole was forced to invest in researching the issue.

As Hargreaves Lansdown’s Adrian Lowcock said to me last week: “[The transfers] would be a great precedent and a great opportunity to think of the bigger picture for clients in the long term.