In a letter to chair of the Treasury committee Nicky Morgan FCA boss Andrew Bailey (pictured) confirmed the regulator had opened a formal investigation into the events surrounding the gating of Woodford’s £3.7bn fund but said he “cannot comment any further”.
Bailey said the FCA had been in contact with the fund’s authorised manager Link Fund Solutions for over a year about liquidity concerns related to the Woodford Equity Income fund (WEIF).
He revealed that WEIF had become less liquid between June 2018 and April 2019 but added the fund did not breach any internal thresholds and was able to meet redemptions throughout.
Responding to the announcement a spokesperson for Woodford said: “We can confirm we have been contacted by the FCA regarding its investigation relating to the events that led to the suspension of the LF Woodford Equity Income Fund and will be co-operating fully with its investigation.”
Woodford fund’s ‘deteriorating liquidity’
Bailey said that the FCA had first engaged with Link Fund Solutions, the authorised manager on the Woodford fund, in February and March 2018 regarding two separate breaches of the fund’s 10% limit on unquoted companies.
No further breaches were reported for the rest of 2018.
From April to December 2018 the regulator held monthly monitoring discussions with Link to discuss Woodford Equity Income’s “deteriorating liquidity position”.
At the FCA’s request to tighten up its risk management of WEIF Link broke down the fund’s liquidity profile into four buckets – the first being the easiest assets to offload, requiring up to seven days to liquidate, and the fourth representing the hardest assets to trade, those that would take between 180 and 360 days to sell.
By the end of April, a third of the fund was in the fourth bucket, while another 32% was in the third bucket, securities that would take between 20 and 180 days to liquidate.
This concentration of illiquid assets hit Link’s “trigger” level, prompting it to launch an investigation into the cause and update its contingency plan.
By May redemptions in the fund were gathering pace. According to the FCA, the fund’s net outflows averaged 1% of NAV per week but by 31 May and 3 June, clients were pulling £296m or 8.2% of NAV. At that time the fund was holding zero cash, having previously drawn down some of an overdraft facility.
On 3 June Link decided to pull the trigger and suspend dealing.
Bailey said: “Link deemed the suspension necessary due to the risk that, in the event the fund did not suspend, assets would have to be sold at prices below current values and that the resulting composition of the fund’s assets would be more illiquid. Neither outcome was deemed to be in best the interests of remaining investors.”
Bailey responds to claims over Guernsey delay
Bailey also responded to claims that the FCA had taken over a month to respond to TISE about a trio of stocks Woodford had listed in Guernsey in an attempt to skirt the regulator’s 10% limit on holding unquoted companies.
He said TISE emailed the regulator on 15 April, requesting a phone call to discuss the suspensions, but had “unfortunately” failed to make contact with “the areas of the FCA that processes and considers these sorts of requests”.
On 26 April he said the FCA “responded immediately” to TISE suggesting a call, which ultimately took place on 8 May.
Bailey said the FCA “became aware of press articles discussing certain securities listed on The International Stock Exchange (TISE) in Guernsey” reportedly held by WEIF by late March.
Prior to the TISE listings in February 2019 unlisted securities in Woodford’s fund made up around 20% of NAV, he said.
“To maintain the reposted level below 10%, the WEIF appeared to make use of rules that derive from the EU Ucits Directive, including one that allows a security to be excluded from the 10% limit, i.e. to be deemed eligible, if its issuer plans to list that security within 12 months. There is no requirement for the fund manager to disclose this to the regulator,” Bailey said.