Regulation  

Fund liquidity: The quest to remove investor roadblocks

  • To gain an understanding about the most recent liquidity problems for open-ended funds
  • Learn about what action the regulator could take
  • Grasp how funds can reduce the likelihood of encountering liquidity issues
CPD
Approx.30min
Fund liquidity: The quest to remove investor roadblocks

The warmer months of the year are rarely as quiet as some in the retail investment space might hope, and 2019 has been no exception. Although market performance has picked up again following a wobble in May, the summer has so far been dominated by asset management quandaries at home and abroad.

Neil Woodford caught the industry off guard at the beginning of June by gating his Equity Income fund in order to raise cash for substantial redemption requests. As Money Management reported in its July issue, the sight of the UK’s best-known fund manager suspending his portfolio has reverberated across the sector – raising questions about consumer platform Hargreaves Lansdown and its fund buy list, and broader concerns about public trust in the financial services industry.

Later that same month came more bad publicity for fund firms. The Financial Times published an investigation noting that six funds run by H2O, an asset management subsidiary of Natixis, had an estimated €1.4bn (£1.25bn) in bonds issued by financial vehicles linked to Lars Windhorst, a German financier. 

Concerns about the potential difficulties of trading these bonds caused investors to vote with their feet: the H2O funds were hit by hefty outflows, while Natixis itself saw its share price drop by more than 10 per cent in the immediate aftermath. H2O has since blamed “deeply unfair” media interest in its portfolios for contributing to heavy fund outflows.

Together, the two sagas have drawn attention to the issue of how illiquid assets should be accessed. In the case of Woodford Equity Income, poor performance in the more liquid part of the portfolio meant that the vehicle’s exposure to unquoted assets kept exceeding the 10 per cent ceiling set by European rules. Having committed in March to entirely removing unquoted assets from the offering, Mr Woodford struggled to shift these at the same time as having to find cash to meet big investor redemptions.

Similarly, revelations about the assets held in H2O funds raised questions about liquidity within the products. The crux of the issue for both the Woodford fund and the H2O offerings is that the products offer daily dealing to clients.

Both episodes have led to a sharper focus on how funds can best provide access to illiquid and less liquid assets, and what the best structure for this might be, at a time when such holdings are playing a bigger role in portfolios. Regulators and industry organisations are now mulling new approaches.

Fresh tack

The Financial Conduct Authority’s consultation paper on the treatment of illiquid assets in open-ended funds closed in January, with the regulator’s final decisions due later this year. But the scale of the problems at Woodford Investment Management has obliged the watchdog to reconsider its strategy.

The regulator noted in its report and accounts for 2018-19, released in July, that the recent crisis would feed into its thinking on the matter in addition to recent consultation work.

“We are considering the feedback to these proposals and will also take into account the lessons learned from the Woodford fund when finalising the new rules,” the watchdog said.

CPD
Approx.30min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. Nicky Morgan says most retail investors see rights to redemption as what?

  2. H2O argues the recent outflows from its funds have proved what?

  3. The Investment Association suggests that a product should be introduced that moves away from what?

  4. The FCA hinted at a liquidity solution in its 2018 consultation. What was it?

  5. How many businesses were on the companies house register at the end of 2017?

  6. According to Mr Sayers, the FCA proposal for funds to gate when there is “material uncertainty” around illiquid assets would harm investors by encouraging what?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • To gain an understanding about the most recent liquidity problems for open-ended funds
  • Learn about what action the regulator could take
  • Grasp how funds can reduce the likelihood of encountering liquidity issues

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