Introduction
Although Origen has never panelled the Woodford Equity Income Fund, its performance troubles and recent suspension has rarely been out of the news of late, so we believe it is worth looking at what has happened and whether other funds could also be at risk of suffering the same fate.
What has happened?
The Woodford Equity Income Fund has had an extended period of underperformance with persistent stock-specific problems amongst its quoted holdings. This led to heightened levels of redemption requests and with several of the fund’s unquoted holdings delaying their Initial Public Offerings (IPOs), the fund manager had to take action in the first quarter of 2019 to prevent the unquoted exposure from exceeding the regulatory limits.
As the level of redemptions accelerated in the second quarter, the Authorised Corporate Director and Woodford Investment Management Limited suspended dealing in this fund’s shares on 2 June 2019, which meant that investors could not withdraw or add to any investments in the fund. This action was taken to allow the fund manager time to significantly increase the liquidity of the portfolio without triggering a fire sale of the illiquid assets that were representing a growing share of the portfolio. Given the portfolio’s exposure to illiquid assets, it is unknown at this point how long the fund will remain suspended, but it should be highlighted that this action has been taken to protect existing shareholders.
Is there an impact on other investment funds?
Suspension of dealing in an open-ended fund is rare. The most notable recent occasion was when property funds ‘gated’, or suspended dealing, after the Brexit referendum in 2016 when investors became very negative about the outlook for UK property as an asset class. This resulted in significant outflows from property funds that are inherently invested in illiquid investments that cannot be sold easily or quickly.
Our panelled funds are chosen and monitored with the assistance of Morningstar and their analysts spend considerable effort to ensure that the managers are managing their funds in line with their specific objectives. Analysts are always looking for exposures to liquid assets rather than unquoted assets.
Summary
There is no guarantee that any fund will not suspend dealing, but the recent instances of the Woodford Equity Income Fund and prior to this, the GAM Investments Absolute Return Bond Fund, have been suspended for fund specific reasons.
The suspension of several Property funds is also different to the issues that have affected the Woodford fund as the underlying investments are known to be illiquid. It is much harder to sell a physical property than it is to trade a share, and the reason for their suspension was a systemic issue that impacted the whole sector following the unexpected result of the EU Referendum.
For a small number of funds, such as smaller companies mandates, there can be an exposure to unlisted or more illiquid stocks, but we would not expect to see the majority of our funds holding such investments. As a result, we would not expect any of our panelled funds to suspend dealing unless in the very extreme circumstances.
These recent events are on the radar of our regulator, the FCA, and also the Bank of England who are monitoring the wider fund market including other asset classes such as fixed income, as well as the specific issues encountered by the Woodford Equity Income Fund.
How we can help
If you have other investments which are not currently included in the advice services we provide to you, please let your adviser know. We can help to ensure that these investments use panelled funds so that they benefit from our fund monitoring service. If you do choose to hold investments outside of our panelled funds, our advisers can review these investments at review meetings to ensure that they continue to meet your expectations and that the funds are continuing to operate in line with their specific. Our advice services help to provide you with reassurance about your investments.
CA4561
Exp: 07/2020
