The Financial Conduct Authority’s (FCA) focus on liquidity risk management in its review of the asset management industry, Jupiter’s decision to shun unlisted stocks and Link’s potential fine show how the Neil Woodford saga continues to loom large over the sector.
The star fund manager was the darling of the UK asset management industry for over two decades with his sage-like ability to pick winners and, more importantly, avoid the losers.
However, this came to an abrupt end in June 2019 when a string of redemptions forced Woodford to gate his equity income fund due to the illiquidity of the underlying assets.
The scandal, which saw the fund shut in October that year, prompted a review from the FCA and the Bank of England which led former governor Mark Carney to warn mutual funds are “built on a lie”.
Liquidity issues roll on as investors still wait for to receive compensation. Earlier this week, the FCA announced it is currently in advanced negotiations with Link Group over a settlement amid issues surrounding the role of Link Fund Solutions in the winding up of the fund.
“Nearly four years have passed since the suspension shocked investors and with parts of the portfolio still not liquidated, investors will rightly feel that this debacle has dragged on long enough,” Ryan Hughes, head of investment partnerships at AJ Bell, said.
“Hopefully, these developments indicate that we may finally be closer to seeing this sorry chapter coming to a close.”
The news came after Jupiter Fund Management pledged to no longer invest in unlisted companies earlier this month.
“From now on, we will not make any new investments into this asset class through any of our open-ended funds,” Jupiter CEO Matthew Beesley said in a letter to clients, seen by Financial News.
Woodford’s style drift into an increasing number of less liquid unlisted stocks was a key driver behind the fund’s collapse in 2019.
Liquidity risk management is one of the key points in the FCA’s review of the £11trn UK asset management industry in the wake of Woodford’s collapse and the suspension of open-ended UK property funds following the Brexit vote in 2016.
“The growth of the fund industry means that liquidity management in funds is also relevant to the good functioning of markets,” the FCA said.
“The regulatory framework contains rules around liquidity management. Many of these rules are designed to protect consumers.”
These issues highlight the flaw of offering illiquid assets in an open-ended vehicle with daily dealing requirements, an issue exacerbated during periods of market stress when redemptions can increase.ETFs, meanwhile, trade on both the primary and secondary markets giving them an extra layer of liquidity, a key structural advantage.
Investors have voted for their vehicle preference as highlighted by the €260bn outflows from UCITS mutual funds versus €85bn inflows into UCITS ETFs in 2022, according to data from the European Fund and Asset Management Association (EFAMA).
“This outcome confirms that investor demand momentum (particularly institutional investors) remains with ETFs thanks to their low cost and trading flexibility,” Bernard Delbecque, senior director for economics and research at EFAMA, said.