The Financial Conduct Authority has refused to name a second fund that has broken rules around holding unquoted companies, as concerns around illiquidity in the market abound in the wake of the Woodford Equity Income fund suspension and liquidity concerns at Gam Investment and H2O.
FCA boss Andrew Bailey told the Treasury select committee on Tuesday that breaching the limit on unquoted companies was a “fairly rare” phenomenon. Woodford was one of two funds to breach the Ucits 10% limit on holding unquoted companies in the past 12 months out of a universe of approximately 3,000 open-ended products, he said.
He named the first fund as Neil Woodford’s equity income fund but did not identify the second, describing it only as “a very small fund”.
The FCA said it would not disclose the other fund that had flouted the rules when Portfolio Adviser approached the regulator for comment.
Bailey illuminates dual Woodford breaches
Bailey shed more light on Woodford Equity Income’s unquoted breaches during his testimony before the select committee.
In February 2018, Bailey said, Woodford’s fund broke past the 10% limit for the first time by 0.02%, which the City watchdog boss called “a small breach but … nonetheless a breach”. A larger breach occurred the next month that Bailey recalled being around 0.5%.
At this point the regulator put an “enhanced monitoring regime” in place and began stepping up its communications with Link, Bailey explained in his testimony.
Bailey said the Woodford Equity Income began losing money “consistently but not dramatically” after reaching its peak size of £10.7bn in May 2017.
Even until quite recently, he said, the net outflows averaging 1% of NAV per week were still “quite manageable for them”. Days before the fund’s authorised corporate director, Link, suspended the fund, clients were pulling £296m or 8.2% of NAV when the fund was holding zero cash.
FCA looking into Hargreaves
Bailey confirmed the FCA was looking into whether Hargreaves Lansdown was too slow to scrap Woodford Equity Income from its Wealth 50 list of favourite funds.
Speaking before the committee, he referred back to a point Chris Hill made about Woodford’s track record containing stretches of underperformance and outperformance.
The FCA has looked at Hargreaves’ best buy practices, first in 2015 when it told the platform group it needed to make changes to the way in which it controlled and governed its Wealth 50 list. Best buy lists also formed a component of its platform market study though was ultimately scrapped from the final report.
The FCA concluded in its platform study last year that the funds on best buy lists tended to outperform on average but Bailey said on Tuesday there were some “outliers”.
