In a speech at the University of Warwick yesterday (June 13), Mr Brazier didn’t name Mr Woodford’s fund, but said: "Of course, redemptions can be suspended – funds can be gated – to limit the selling pressure.
"But such measures are a double-edged sword. They can allow time for an orderly re-structuring of a fund, avoiding unnecessary fire sale pressure, but the expectation that such measures could be imposed tomorrow can create an incentive to be at the front of the redemption queue today.
"We saw in both 2008 and 2016 how fears and incentives like these can drive material outflows from funds invested in commercial property.
"This isn’t an issue about a single fund or even about funds invested in a single asset class. Any incentive for investors to be at the front of the queue might be detrimental to the resilience of finance for the real economy.
"The emerging evidence is that companies whose existing liabilities are subject to selling pressure from funds tend to cut back new issuance and – presumably to protect their cash flow position – cut both investment and employment."
Mr Woodford suspended dealing in his Woodford Equity Income fund on June 3 due to the weight of investors seeking to withdraw their cash, and he specifically cited a desire to restructure the fund and not be a forced seller as the reason for suspending the fund for 28 days.
The composition of his fund had changed in the years since its launch in 2015.
In the beginning the top ten holdings comprised many FTSE 100 companies such as Astra Zeneca and Imperial Brands, but on the date of suspension it contained many more mid cap companies such as housebuilders, while a significant portion of the fund's assets were invested in unquoted or unlisted assets.
But Mr Brazier doesn’t believe that suspending the fund will help in this regard.
He said: "More than £23.3trn of global assets are now held in investment funds that offer frequent, often daily, liquidity to investors despite investing in potentially illiquid underlying assets.
"When investors in these funds redeem their investment, the fund must sell a slice of its assets to meet the cash need. As redemptions accelerate, a fund can become a forced seller.
"This ‘fire sale’ pressure can matter. It can help to drive asset prices down and tighten credit conditions during downturns.
"It is therefore striking that, the more illiquid (that is, difficult to trade) are the assets held in an open-ended fund, the more aggressively its investors withdraw their funds as the prices of the assets held in the fund fall."
He said the bulk of such illiquid assets were bonds, and a sharp sell off in the bond market tended to make debt more expensive, which had consequences for overall economic growth.
david.thorpe@ft.com
