Shares of one fund plunged 22% on Friday. Other funds under pressure, raising serious questions about just how liquid “equity funds” in the UK are.
By Nick Corbishley, for WOLF STREET:
There’s still no sign of relief for the hundreds of thousands of investors whose money is trapped in one of the UK’s biggest equity funds, the Woodford Equity Income Fund. The fund is supposed to offer its shareholders daily liquidity, meaning they can take part or all of their money out any day of the week. But that was before a slow-motion (but accelerating) run on the fund forced its manager, hedge-fund legend Neil Woodford, into taking the last-gasp decision, on June 3, to place a ban on redemptions. Since then, investors have been unable to access their money. And it’s not clear how much longer this could go on.
The problems at Woodford have raised serious questions about just how liquid other equity funds in the UK may be. In the past few days, UK’s biggest broker, Hargreaves Lansdown announced that it plans to remove the Lindsell Train UK Equity Fund, the largest managed UK shares fund, and the Lindsell Train Global Equity Fund, from its Wealth 50 Best List due to liquidity concerns, which prompted shares in Lindsell Train Investment Trust to tumble 22% on Friday.
The £7.1 billion LF Lindsell Train UK Equity would need an estimated 13 working days to sell 20% cent of its portfolio if trading conditions severely deteriorated, according to Morning Star. Woodford’s shareholders have already had to wait almost 3 times that long, and there’s still little sign of light at the end of the tunnel.
The Woodford Equity Income fund has performed terribly for the past two years. Bad bets were made, often on unlisted assets, resulting in big losses, which in turn triggered a cascade of redemptions as the sharpest investors began yanking out their money. The total amount under management at Woodford has steadily shrunk by almost two thirds since 2015, from £10.2 billion to £3.7 billion.
At the very least, Woodford’s investors will have to hang on for another three agonizing weeks, when the decision to gate the fund is scheduled to be revisited. When the last 28-day review period came up, around a week ago, Woodford told the UK’s Financial Conduct Authority that the fund was still not ready to reopen its doors.
“Of course, we understand that people want access to their money, they are very frustrated by not being able to deal in the fund. But we are using the time . . . to ensure we get the right outcomes for our investors,” said Mr Woodford in a video statement to investors on Monday.
Woodford’s words did little to soothe the nerves of the fund’s shareholders, who include at least three local authority pension funds. Their biggest concern is that by the time they’re actually able to access their money, much of it will have gone due to the steep discounts Woodford will be forced to accept on his holdings of unquoted and illiquid assets.
Most of Woodford’s liquid assets are already gone having been sold off when the giant flood of redemptions began. By this spring, only three of the fund’s 105 holdings were FTSE 100 companies, and only 26 paid out dividends, which is highly unusual for a fund that is supposed to be almost exclusively devoted to equity-income.
In recent weeks Woodford has reduced his holdings in Raven Property and Horizon Discovery, two long-term investments, as well as other listed companies, including BCA Marketplace, New River Reit and Oakley Capital Investments. But most of the remaining assets are highly illiquid, which means selling them will be a lot more difficult, unless at a very heavy discount.
By EU law, equity funds like Woodford’s are allowed to hold a maximum of 10% of their portfolio in transferable securities that are not dealt in an “eligible market” such as the FTSE 250. To get around this rule, Woodford reportedly bundled up his fund’s illiquid unlisted assets and listed them on the minuscule Guernsey-headquartered International Stock Exchange, which despite its impressive-sounding name has barely any trading activity at all.
This was enough to lend his most illiquid assets the appearance, albeit flimsy, of liquidity. The move was within the letter — though not the spirit — of the law, according to the FCA chief executive Andrew Bailey. Mr Bailey told the Commons Treasury select committee that Woodford Equity Income fund was “sailing close to the wind,” adding that “listing something on an exchange where trading does not actually happen, as far as I can see, does not actually count as liquidity.”
Yet all the time Woodford was doing this, no one at the FCA kicked up a fuss. And Hargreaves Lansdown sent more than £1.6 billion of investors’ money Woodford’s way. It even kept on recommending his funds up to the very day Woodford gated his flagship equity fund. In total, around a quarter of Hargreaves customers, just under 300,000, are exposed to Woodford Equity Income, either directly or indirectly.
The brokerage house now faces allegations of conflicts of interest. Mark Dampier, the 62-year-old research director at Hargreaves who has long been one of Mr Woodford’s biggest cheerleaders, has close ties to Woodford dating back more than 25 years. As for Hargreaves’ billionaire co-founder, Stephen Lansdown, he was until 2017 deputy chairman of the same International Stock Exchange in Guernsey that Woodford used to dodge limits on illiquid investments, and still owns almost 10% of the company.
“Hargreaves failed to manage some serious conflicts of interest and should have put in place internal controls that prevented it from having such a large exposure to Woodford Equity Income,” Anthony Morrow, chief executive of financial advice service OpenMoney, told the FT. By Nick Corbishley, for WOLF STREET.
“Decline in buyer confidence,” diesel death spiral, and plunging sales of plug-in hybrids. But EV sales soar. Read… UK Auto Sales Drop to Five-Year Low
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Too bad “investors” think liquid markets are always liquid. LTCM and AIG both took a long time to unwind the assets, but nobody remembers that part.
Coming soon to an exchange near you!
When will it all hit the fan? Everyone wants to know.]
And thanks Wolf. Very much enjoy your newsletter.
Why invest in a ‘fund’ where typically they charge a percentage on the capital and another on any gain? Anyone can buy shares, it’s selling them that’s the problem…..
kk
Theoretically, the hard part is “picking” the shares, which is what investors in these things pay the money for.
What’s going on now is technically called “using mirrors to find the next greater fool”…
Yes – to give the ‘greater fool’ phenomenon its technical term – ‘momentum investing’.
The Donald thinks we don’t have enough rampant, reckless speculation of this nature and that the DJ should be 5K higher or more, because…well, just because.
Free money for all those who have the money to speculate. Until the music stops and then no doubt the much-hated state will be expected to step in and clear up the mess again.
Diversification – and the avoidance of much boring bureaucracy.
It will be quite difficult to get anything like a robust portfolio using the typical 500-1000 EUR a month that most “investment”-ready people can afford to save. These days even “large cap” shares will take a dive of 10%, even 30% on a bad day. When this happens to the fledgling portfolio of maybe 5000 EUR on 5 “super-safe, stable” securities it is demotivating.
With most of the selection of funds that ones bank is offering, one can set up direct payments into a few funds and forget about it. If one pick the ones with the lower fees, the costs will be less or on-par than with personally managed discretionary investments. Usually, the risky and potentially illiquid funds are actively managed and often amongst the most expensive. The prospectus will also tell a bit abut what is “in it”.
Then, once “the base” is established and running on autopilot, of course one can dabble in single shares and certificates to complicate one’s tax returns with. Even if nothing else is gained, it will keep the gambling bug happy so one is not meddling with the funds.
Hey Neil, maybe you should mark to market your holdings, then explain you can’t meet redemption’s cause valuations are dog shit… Value marked stems from rosy 2017 valuations, when liquidated in real time value might be 50 % lower, especially in a global recession.
Clowns are gonna clown… We need Lagarde to come out and say it’s all contained, DB is back doing Repo 105 and ponzi funds dropping like flies in EU
Liquidity here means it falls from your hands like water, right?
Exactly, then it evaporates right before your eyes!
Nick,
Many thanks for the update.
Lack of liquidity? Well we’re sure glad that we don’t have that problem on these shores. /sarc
But in all seriousness, this should serve as a nice wake-up call to folks across the globe. Liquidity is NOT there for many asset classes, absent CB backstops. Those backstops are slowly giving way.
Lots of bond ETF holders will find out the hard way that what they thought was a liquid asset has frozen solid. LQD, in particular, looks like a ticking time bomb with nearly half of its IG portfolio rated BBB.
Thanks for the info…I will check that out and get some puts maybe strike it big!!
The UK government, for instance, persists in regarding the ludicrous bubble valuations of housing stock as ‘national wealth’ – subtext: so let’s not worry about all that public, corporate and consumer debt’ – but to whom can it be sold? Only to those who already own such assets.
The media and dumb public share this dubious, if comforting, sentiment.
Whats that US phrase, ‘Bug looking for a windshield’? -that’s the UK……
Euro Flu?
Get’ er done ,Print the money and just do it . The CB’s all over the world have signed on to the infinite leveraged fiat system and they have to play it to the bone.l just don’t want to listen to a soon to capitulate Carney yak away about it .
Bloody hell — it’s as-if these wankers are clueless!
==> The warning follows a number of high-profile liquidity issues in regulated funds. H2O Asset Management – a subsidiary of Natixis – experienced a high level of redemptions after it emerged that some of its bond funds were invested in illiquid holdings.
https://www.ipe.com/news/asset-managers/fitch-warns-on-liquidity-risk-in-european-high-yield-bond-funds/10032108.article
Cockney rhyming slang for w*nker is ‘merchant banker’.
Entirely apt.
Hey, don’t sully the name of harmless and innocent wankers (that’s all of us, isn’t it..?)!
Similarly, ‘whore’ and ‘banker’ are often incorrectly juxtaposed.
There are some lovely ladies of easy virtue, just trying to scrape a living, but few bankers one would care to know….
The problem as shareprophets pointed out as long ago as 2015
Is that woodford thought he could do no wrong the market was always wrong and he was right
Most of the illiquid stuff he holds
Are just money guzzlers and he was forever topping them up with more of other people’s money
He could have got away with it if some of his large holdings in FTSE
350 stocks had not been so badly hit as well
he and every one else thought he could walk on waters do he couldn’t
Is Woodford Irish? Sounds like Paddy who came home from the pub to announce to his wife that he had bought a VCR. Paddy she says, where did you get the money, easy said Paddy I sold the T.V.
At least he didn’t sell the whole house (at an extreme discount) into a market with almost no buyers :-)
Speaking of which: Just recently Oscar Properties (Stockholm) seems to have discovered that liquidity in the market for a portfolio of super-duper expensive flats isn’t exactly that great either!
https://www.va.se/nyheter/2019/04/02/oscar-properties-stortdyker-pa-borsen-igen-efter-bistra-besked-till-aktieagarna/
Harbinger of things to come, I’d say. Get some Bear ETF’s for Brexit!!
it is risky to buy a high yield stock, bond or fund. Caveat emptor (Latin) – buyer beware.
Woodford needs to be taken to the woodshed for a proper thrashing.
In 1994 I met an actuary that informed me to advise clients (I have a small accountancy practice) not to take out private pension plans or endowment mortgages.
As a result I lost a few clients that “had friends that were advised by their accountants it was a great tax saving device”.
People with private pensions are in for a shock in the future.
I am probably dumb, but the fund invests in stocks, bonds etc and it is worth whatever the value of those are at any point in time and each customer’s value will also therefore be stated as a real number based on the underlying shares etc. So if a customer wants their cash out they can only draw what is the stated value which should physically exist, even if at a loss, no? Why can Woodford not honour the demands unless some sort of ponzi is in operation?
And of course the regulators who are supposed to protect the public do no such thing. Why is he allowed to withhold funds?
Because in order to sell an asset, you need a buyer. For assets not traded on a marketplace (such as a stock exchange) you first need to find a buyer, then negotiate a price etc, actually transfer title in exchange for cash, and only then are you able to give your investor their cash back
“hundreds of thousands of investors whose money is trapped”
This phrase always makes me laugh!
And for some unknown reason “people” still believe they own “their” paper-money.
Capitalism means the free movement of capital. How can Woodford stop investors from withdrawing their Capital ? Still, Free Market Capitalism ceased to exist in 2008.
“. . . run on the fund forced its manager, hedge-fund legend Neil Woodford, into taking the last-gasp decision, on June 3, to place a ban on redemptions.”
Being an average small investor, my understanding is that in the U.S. the Federal Reserve system could kick in, since almost nothing is worse that a run on a major financial firm, other than the firm actually closing its redemption window (bank-style holiday). And if it can’t perform some miracle to regain trust, what happens when the window finally opens? It’s been closed about five weeks now.