Bank of England governor Mark Carney has said open ended funds offering daily dealing when having significant investments in illiquid assets, such as Woodford Equity Income, are "built on a lie".
Mr Carney was speaking before the Treasury Committee of the House of Commons today (26 June). His comments did not relate uniquely to Mr Woodford’s Equity Income fund, but to open-ended funds investing in illiquid assets in general.
Mr Woodford was forced to suspend his fund on June 3 following outflows of £9m a day in May. Under European regulations governing open-ended funds in the UK, such funds are not permitted to hold more than 10 per cent of their assets in unquoted holdings, as those assets are less liquid than most listed stocks.
The outflows from Mr Woodford’s flagship fund meant he breached the 10 per cent limit several times, and was forced to suspend the fund when a £255m outflow from his fund by Kent County Council forced him to suspend redemptions.
Mr Carney told the select committee funds offering daily liquidity while investing in assets that are not liquid were "built on a lie", and said it might be better for investors not to be able to access their cash on a daily basis.
He said there were billions of dollars around the world in such illiquid assets, but offering daily liquidity.
Mr Carney said: "This means there is a reliance of daily market liquidity, and that is heavily reliant on central bank policy."
This is a reference to low interest rates and the policy of quantitative easing, which boost liquidity. This is because low interest rates and low bond yields disincentivise investors from holding cash or other low yielding assets, and so invest in every riskier or less liquid assets in order to get a return.
Mr Carney said the volume of illiquid assets in the world was a "systemic risk" to the global economy.
He was responding to questions from Steve Baker, MP, who declared an interest as an investor in Mr Woodford’s suspended fund.
The Investment Association announced this morning its intention to launch a new fund sector, which would not offer daily liquidity and so could hold less liquid assets in an open-ended fund structure.
david.thorpe@ft.com
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