The UK funds industry has been accused of ignoring a “massive warning shot” from the collapse of Neil Woodford’s Equity Income fund as fresh data from the Financial Conduct Authority reveals a spike in liquidity breaches during the worst of the Covid-19 sell-off.
Nine funds, which were not named by the FCA, breached Ucits rules, which prohibit funds from having over 10% of their net asset value in illiquid stocks, 13 times between March and May when markets were at their most volatile as Covid-19 spread across the world.
Bloomberg obtained the information from the City watchdog via a public records request.
The FCA data shows most of the breaches occurred in March when markets were in a free fall and the value of listed securities plunged. By June the regulator said the breaches had subsided.
FCA speaks out on Covid breaches
The liquidity mismatch of open-ended funds owning illiquid assets has been thrust into the spotlight since the suspension of the Woodford Equity Income fund, which trapped hundreds of thousands of investors who over a year later are still waiting to get their money back.
Additionally, Natixis-owned H2O Asset Management suffered from a liquidity crunch last year. More recently during the coronavirus crisis open-ended property funds were one-by-one forced to shut up shop though this boiled down to an issue valuing the underlying assets as opposed to a liquidity problem.
See also: £5bn worth of UK property funds remain suspended despite clarity on valuations
Data obtained by the Financial Times via a separate Freedom of Information request indicated these were far from isolated incidents. Seven funds were found to have breached the 10% limit eight times since 2017, not including those made by the now defunct Woodford Equity Income fund.
In a statement to Bloomberg the FCA reiterated that it was up to the fund’s authorised corporate director to stay on top of managers who have breached the rules and report these findings to the regulator.
“FCA rules require depositaries to ensure that any managers breaching any rules resolve these in a timely manner, and in the best interests of investors,” the regulator said. “The FCA’s role is to ensure that these depositaries report the breaches to the FCA and resolve them properly.”
Industry has had time to address unquoted stocks since Woodford blow-up
Given the high-profile fund blow-ups in 2019 Willis Owen head of personal investing Adrian Lowcock said he is surprised by the number of funds that have breached the rules on unquoteds this year.
“The industry and the regulator had a massive warning shot across the bows in Woodford’s collapse as well as H20 and the ongoing property funds issue,” Lowcock said.
“The industry has had an opportunity to address unquoted stocks and indeed many asset managers have taken steps to reduce their exposure – although we know that exiting these investments can take time,” he added.
Merian Global Investors was among the fund groups that revealed it would transfer harder-to-trade stocks from its small and mid-cap Oiecs into its closed-ended Chrysalis trust following the Woodford scandal.
See also: Oeics accused of treating trusts as ‘dumping ground’ for unquoteds
Woodford’s protégé at Invesco Mark Barnett also announced he would rid his open-ended funds of unquoted stocks, which he inherited from his predecessor, after revealing his illiquid holdings face a 60% write down in March. Following the coronavirus sell-off the unquoted portion of his Invesco High Income and Income funds was hovering between 8-9%.
Lowcock said that longer-term investment trusts were much better suited structurally to invest in the UK’s nascent companies and unlisted investments.
“It is very clear that highly illiquid assets don’t really belong in an open-ended structure,” he said.
