The Financial Conduct Authority (FCA) is worried multi-manager funds are facing a liquidity crunch due to their exposure to the failed Woodford Equity Income fund (WEIF).
According to the Financial Times, the regulator is probing funds worth more than £15bn that have holdings in Neil Woodford’s collapsed equity vehicle that was frozen in June. It is concerned these multi-manager products are risking illiquidity if underlying investors suddenly decide to pull their money out.
While investors in the multi-manager funds have indirect exposure to WEIF and are free to redeem their cash at any time, the multi-manager funds themselves cannot sell out of WEIF and thus would be forced to sell down positions in other funds to meet redemptions. However this would increase the size of their holdings in WEIF and potentially lead to a liquidity crunch.
Hargreaves and Quilter not concerned
Analysis of Morningstar data by the FT found at least 15 UK retail funds are exposed to Equity Income, including the multi-manager funds run by Hargreaves Lansdown and Quilter Investors.
It said three Hargreaves’ multi-manager funds have Equity Income in their top 10 holdings and the fund makes up about 11% of Hargreaves’ £2.6bn Income & Growth fund.
Hargreaves told the FT it expected WEIF to have a “limited” effect on its multi-manager funds because it is one of 60 funds the portfolio invests in and it expects redemptions to be “easily met” from cash and selling down holdings that had performed well.
Quilter Investors has £8.9bn in multi-manager portfolios exposed to WEIF.
A Quilter spokesperson said the holding of Woodford Equity Income is about 1% of the active portfolios.
They added: “While we are naturally disappointed with the situation, we are not concerned about liquidity in our portfolios. One of the benefits of multi-asset funds is the diversified nature of the portfolios and subsequent reduction in risk to the portfolio, either from a performance or liquidity perspective, from any one holding. Investors in the portfolios can redeem fully and are not impacted by the nominal position in Woodford.”
Octopus plays down contagion risk
According to Morningstar, two multi-manager funds run by the Share Centre have holdings in WEIF, as do the £106m CAF UK Equity, the £24m Gemini Principal Asset Allocation and the £12m Octopus UK Equity funds.
An Octopus spokesperson said: “The Woodford Equity Income fund currently makes up 6.8% of the Octopus UK Equity Fund. However, the majority of investors – over 80% – access the Octopus UK Equity Fund as one component of a broad diversified portfolio of fund of funds. This means that for these clients the maximum exposure they have to the Woodford fund is 0.85%.”
They added: “We believe that contagion risk is low with regards to the Octopus UK Equity fund given how liquid and diversified the portfolios are.”
FCA in regular contact with intermediaries
The FCA declined to comment.
The regulator has however previously said managers of funds of funds must ensure the portfolio is diversified to avoid excessive concentration in any single holding. It applies a limit of 20% of net asset value that may be invested in any one fund.
It has also publicly said it is in regular contact with platforms and intermediaries about their handling of potential fund suspensions in a range of situations.
