Last week’s dramatic suspension of investor withdrawals from the Woodford Equity Income Fund means thousands of retail investors will be unable to access cash tied up in the fund for at least 28 days. The freeze could potentially stretch to months while Neil Woodford, the listed fund’s manager, attempts to sell off assets to raise the liquidity needed to fund further withdrawals. Because many of the fund’s assets consist of equity in illiquid, unlisted private companies, there is very little clarity on how long it might be before investors will again be able to sell their holdings should they wish.
The incident has prompted Andrew Bailey, the chief executive of the FCA, to suggest in an interview with the Financial Times that rules might need updating to further protect investors in listed funds.
The FCA, the body which regulates the UK’s consumer-facing financial services and investment products market, does have rules designed to prevent funds encountering liquidity problems when a rush of investors move to cut their losses by selling holdings. These include a stipulation that listed funds hold no more than a 10% allocation to equity in privately held companies.
Because these holdings can’t be quickly and easily sold on an exchange in the same way as exchange listed assets, any major outflow of investor capital is difficult to facilitate without a fire sale at significant losses. The Woodford Equity Income Fund was invested in a lot of privately held companies, particularly in the biotech sector. To get around the rules, Woodford listed several companies in which his fund had sizeable stakes on the Guernsey Stock Exchange. This meant they theoretically became publically traded companies and didn’t count towards the 10% threshold. However, in reality, these stocks were rarely traded and have low liquidity.
When the latest wave of investor redemptions hit the fund, which has shrunk to around £3.7 billion from a peak of over £10 billion, Woodford was forced to suspend trading last week in order to rebalance its assets for greater liquidity. The current asset mix simply didn’t have the liquidity levels to be sold off to raise the cash to pay out the number of redemptions being requested.
The FCA has also come under fire for a perceived slowness in its response to the crisis and the fact its rules, set out to protect retail investors, were so easily worked around by the fund – leading to exactly the situation they are supposed to prevent. The Guernsey Stock Exchange has said it had contacted the FCA in April with concerns over the Woodford holdings but a meeting was not set up until a month later.
Mr Bailey has said that the FCA will learn “lessons” from the current Woodford situation as it finalises new rules for open-ended funds investing in illiquid assets. The last time retail-facing funds suspended trading in this way was a number of REITs forced into the same action in 2016 after the Brexit referendum spooked markets. But Mr Bailey also cautioned wider changes that would affect investment funds such as Mr Woodford’s would have to be done at an EU level.
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