Investors in the Woodford Equity Income Fund may have to wait for much more than a month to get access to their money again, while the financial regulator pledged to examine some industry practises.
When Neil Woodford’s flagship Equity Income fund was gated at the beginning of last week, locking in investors while the former star fund manager looked to sell all the fund’s unlisted holdings, this opened a can of worms for the industry as a whole that has continued to spread wider ever since.
As well as raising the spectre of forced asset sales for the Woodford Equity Income Fund (WEIF) and questions about the cosy connections between Woodford and certain other parties, there continue to be new repercussions emerging for the whole fund management and platform industries.
Andrew Bailey, boss of the Financial Conduct Authority (FCA), said on Tuesday that the City watchdog would now “look into” the practice of fund platforms recommending buy-lists of favoured funds to their customers, which are a significant influence on the buying and selling decisions of retail investors.
More urgently for investors who invested in the WEIF, perhaps following a recommendation from their investment platform, is finding out when the fund will be open for redemptions again.
When will the WEIF suspension be lifted?
Last Monday, Link Fund Solutions, the authorised corporate director of the fund, suspended WEIF for redemptions and new purchases. WEIF is an open-ended fund, or unit trust, where investors buy or sell units of the fund, and means the fund is normally always open to new investment or withdrawals.
But having been shuttered, Link said it will formally review the suspension “at least every 28 days”, but added that it will “monitor the situation on a daily basis” for signs that the “exceptional circumstances” that led to the suspension have eased sufficiently.
A Woodford spokesperson told Proactive Investors: “We are in constant dialogue with [Link] and the fund will reopen as soon as is appropriate and in the interests of all investors.”
Once the suspension is lifted, investors will be free to buy or sell their units, with the price of the fund dependent on the value of the underlying assets at the time.
“No one knows how investors will react when the suspension is lifted but if there are redemption requests, the repositioning of the portfolio should ensure there is adequate liquidity to be able to meet those,” said Ryan Hughes, head of active portfolios at AJ Bell, another London-listed player in the investment platform industry.
“The issue is that some of the positions the fund holds in unquoted stocks are very large and they are not going to be easy to sell quickly. Investors will therefore have to be patient and not be surprised if the suspension is extended beyond the initial 28 days.”
How will Woodford investors react?
The reason for the suspension of redemptions is to give the fund manager time to ensure there is enough liquidity in the fund to meet redemption requests, as was seen when Standard Life, Aviva Investors, M&G and others gated their property funds when Brexit worries led to investors pulling £5.7bn from the sector in early 2016.
Woodford has stated that he is repositioning the fund away from unquoted stocks to FTSE 350 firms, with his long-term intention not to have any exposure to unquoted holdings in WEIF. Exposure is expected to decline over the remainder of the year to below 10% and eventually the fund's only exposure to unquoted assets coming through closed-ended investment vehicles managed by Woodford Investment Management.
“Anyone holding the fund in their pension or ISA can only sit tight for now and wait further information from Woodford IM,” said Hughes.
“When this comes, the key will be to look at what Woodford has done with the portfolio and investors can then decide whether it is an investment they want to hold for the long term.
“Whilst investors will undoubtedly be unsettled by these recent developments it is important that they try and take a step back and have an objective look at whether the portfolio and investment strategy that Woodford communicates when the suspension lifts is right for them.”
Regulatory intervention likely?
The inclusion of the WEIF on online broker Hargreaves Lansdown PLC’s (LON:HL.) buy list clearly helped Woodford amass £10.2bn at the fund’s peak, with HL’s customers holding a massive 30.5% of all the money in the WEIF at the end of last year and around £2bn of Woodford’s £10.1bn total assets at the end of March. The FTSE 100 company cut WEIF from its list last week.
Though the FCA only recently gave the fund supermarket industry a clean bill of health, finding that funds on best-buy lists outperformed funds not on them, Bailey told the BBC on Tuesday that the FCA would “look again” at the practice.
“We look at how funds construct these best-buy tables, and the principles are that they should be impartial, do it thoroughly and they should make sure it's done properly in the sense that they should be up-to-date,” said Bailey.
“We will look at these again to ensure that they and indeed others - it's not just a point about Hargreaves Lansdown - have abided by those principles.”
READ: Hargreaves Lansdown steadier after recent Woodford-related plunge as Numis ups to ‘add’ from ‘hold’
Terry Smith, manager of the popular Fundsmith Equity fund that was left off Hargreaves Lansdown’s best-buy list after he refused to cut his fees, said in January that funds in the list "were chosen mainly for fund managers’ willingness to comply with a charging structure which enables Hargreaves Lansdown to maximise its own profitability". This week he said he stood by the comments.
As part of its report into best buy lists in March this year, the FCA stated that it expects best buy lists to be constructed on an impartial basis.
Hughes said this is likely to be where there is likely to be greater scrutiny.
He argued that such lists "have an important role to play in helping customers narrow down the huge number of funds into a manageable short-list as part of their research process" and said the FCA should not replace the need for investors to do their own detailed research on each fund and its investment style and objective before deciding whether to invest in it.
Bailey also said that lessons from Woodford’s problems would be taken into account by the FCA as it puts the finishing touches to new regulations for open-ended funds investing in illiquid assets and also touched on the issue of fees.
Fund manager fees
Those who are not fans of the fund management industry have an issue that managers reward themselves generously whether their investor and pensioner customers make money or lose money.
An annual fee for an active fund manager, whether that’s 0.75% fee adds up to £75mln of income every year, more money you have the more difficult it is to manage, especially investing in less liquid funds. when get into trouble, its difficult, but fund manager still keeps getting paid.
But this is central profit point of the of the active fund management industry and it seems highly unlikely that the regulator would intervene over fund managers paying themselves, even if it is often when performance is not going especially well.
Last year, after a two-year investigation, the FCA warned fund managers that they should act in investors’ best interests by moving them into cheaper versions of funds, and proposed new rules on performance fees and overhauling how asset managers disclose fund objectives.
As part of his Tuesday interview, the FCA weighed in on the fees issue, though his comments suggested he felt that active managers deserve their rewards.
Bailey said that Woodford should review his charges, which range between 0.5% and 0.75% on most platforms, while the fund is suspended but stressed that “we need him to manage these assets now more than ever”.
“His job now is to get this fund back into a position where there can be orderly trading, so he has his work cut out now,” he said.