The ongoing drama surrounding Woodford Investment Management has dominated the financial press. The Woodford Equity Income Fund will be wound up early next year. Neil Woodford has been sacked. Investors still cannot get their money out.
Stuck in the Fund
Illiquidity means being unable to easily exchange an asset for cash. It means not being able to get your money when you choose. A piece of art or a house are illiquid as it takes time to find an interested buyer. For fund managers like us, illiquidity means it is hard to actually execute the trade. Similar to an item put to auction, the opportunity to sell doesn’t come around too frequently and buyers aren’t guaranteed.
The Woodford UK Equity Fund comprised many illiquid assets including private companies not listed on a stock exchange, making the assets less attractive for buyers and therefore harder to sell. Although the Woodford Equity Income Fund offered daily liquidity, it could only be as good as the assets held within the fund.
Illiquid strategies are OK whilst there is money coming in and no holdings have to be sold, but when clients want their money out and cash flow is negative, assets need to be sold. If assets can’t be sold, the fund liquidity will dry up. This is what’s happened. The wind up will eventually create liquidity and at some point next year investors will get (at least some) monies back. For now, investors are stuck.
Free Flowing
Clients keeping control of their finances is key. We’ve been managing the Courtiers multi-asset funds for almost 13 years, which includes the 2008 Global Financial Crisis, and clients have always been able to access their money. In addition to careful stock selection and monitoring, an Investment Risk and Oversight Committee regularly reviews the liquidity of Courtiers funds, considering how long it would take to sell each position.
Many financial assets we can invest in trade daily, offering “daily liquidity”. This means we can expect to exchange an asset for cash on any trading day and receive settlement usually within two to three days, so you can quickly get your money out.
Good examples of liquid assets include large companies listed on the London Stock Exchange such as Vodafone, GlaxoSmithKline, Royal Dutch Shell, HSBC and BP. A fund comprising these types of companies can offer daily liquidity as it can easily sell its positions.
FCA Action
After the suspension of seven UK property funds since the 2016 Brexit referendum, the Financial Conduct Authority (FCA) has confirmed new rules for property funds. The rules require additional oversight, increased disclosure, risk warnings and contingency plans. There are also specific rules for suspension of trading in such property funds, which will either result in more frequent suspensions, higher cash holdings or probably both. The regulator now plans to review daily dealing.
Deep Dive
I will be talking more about liquidity and governance at our 2019 Client Seminar in December. We look forward to welcoming you.
