Questions are being asked around the world about the liquidity risks of funds invested in unlisted or illiquid assets, after a major UK fund was forced to suspend trading when it could not sell assets quick enough to meet redemption requests.
The £3.6 billion Woodford Equity Income Fund was suspended on 3 June, due to rising redemptions after a long period of under-performance — it was down 22% in the past year. The fund had been known for holding unquoted stocks and other illiquid investments which means the most liquid investments must be sold to meet redemptions.
It’s a fall from grace for well-known UK stock-picker Neil Woodford, who made his name over 26 years with Invesco Perpetual where he helped build up around £33 billion of assets.
In his first year alone the Equity Income fund gained 16%. Initially the fund was focused on picking large, liquid stocks. But the fund had been performing badly for several years, dropping from £10.2 billion to £3.7 billion in assets in just two years.
Part of this decline was due to the fall in popularity of this style of fund, but bad stock selection and redemptions played a big part. In May 2019 alone the fund suffered a £560 million drop in assets. To avoid becoming a forced seller of shares at fire-sale prices the fund froze redemptions at the start of June.
UK funds can hold a maximum of 10% of assets in unlisted securities. But the Financial Conduct Authority (FCA) says the Woodford fund breached that limit twice in early 2018. Some companies in which the fund held shares later listed on the International Stock Exchange on the island of Guernsey, which helped the fund stay within the 10% limit.
The FCA has announced a formal investigation into the Woodford suspension, which may prove to be uncomfortable for the regulator. It admits it knew since February 2018 of the liquidity problems faced by the fund and made errors in communications with the Guernsey authorities.
Meanwhile, the FCA has been forced to withhold a report on funds that buy illiquid assets that has been six months in the making. Consultations were held in January 2019, with the final report due for release before the end of June. That plan has now been abandoned, with no due date for release scheduled.
This example highlights the importance of knowing what assets are within an actively traded fund, versus an index fund. The proportion of assets in the Woodford fund estimated to take over 180 days to liquidate had increased from 25% in June 2018 to 33% by April 2019.