Jupiter’s Jason Pidcock finds the number of open-ended managers investing in unquoteds “extraordinary” and predicts after the Neil Woodford scandal stricter liquidity hurdles are inevitable.
Speaking to Portfolio Adviser Pidcock (pictured) said the implosion of Woodford Equity Income has shone a light on how many open-ended managers have been investing in less liquid, unquoted companies.
Merian’s small and mid-cap funds contain unlisted stocks though last month it decided to shift the bulk of these into its closed-ended Chrysalis trust, in a move that was apparently motivated by the Woodford blow-up.
Woodford’s successor at Invesco Mark Barnett also holds a number of legacy unquoted positions in his funds but has ruled out transferring them to his investment trusts.
“Even though I’ve been doing this for 26 years, until the last three months, I had no idea how widespread that was,” Pidcock said.
“I never have and never will invest in an unlisted stock. I cannot understand how any manager of an open-ended fund would choose to do that. I find that extraordinary.”
Liquidity mismatch
Pidcock told Portfolio Adviser that 78% of Jupiter Asian Income could be liquidated in three days using a 20% average daily volume, adding this is a “fairly conservative measure”. “In reality, our dealers could, I’m sure, do more than 20% quite comfortably if they needed to.”
He does not invest in companies with a market cap below $2.5bn. Roughly half of the fund’s 30 holdings are companies with a market cap higher than $30bn compared with 16% that are made up of companies valued between $2.5bn and $7.5bn.
The maximum amount he’ll hold in any one stock is 7% and the minimum investment is 1%.
Asked whether unquoteds should be allowed in open-ended funds at all, Pidcock said, “it’s probably not appropriate much of the time” and suggested they were more suitable for private equity funds and investment trusts.
“Ultimately, I don’t think you should have a liquidity mismatch. If you’re presenting your portfolios as liquid and if you have it daily priced and open-ended, then what you hold in it must be liquid too.”
FCA liquidity rule change ‘inevitable’
Following the Woodford scandal Pidcock believes it is “now inevitable” that the Financial Conduct Authority and other relevant regulators will bring in more stringent hurdle rates for liquidity.
Currently the regulator has a 10% hard limit for unquoted stocks in Ucits products.
The FCA has updated its rules for “certain” open-ended funds investing in illiquid assets but these controversially excluded Ucits funds like Woodford Equity Income which suspended in June after one of its largest institutional investors Kent County Council tried to withdraw its £263m investment.
But Pidcock doesn’t foresee having to make any changes to his liquidity hurdle.
“I do of course keep an eye on my key competitors. And I think this is, I shouldn’t say the most, but … I see this as a very liquid fund within my space compared to my competitors.”
Lessons learned from Woodford will be good for the industry
While some have been quick to interpret the Woodford saga as a condemnation of the industry’s preference for daily dealing funds, Pidcock said being able to get your money back when you want is a “reasonable demand”.
“I think it’s there because that makes things easier for our clients,” he said of daily liquidity. “If there was genuine client demand for less liquid funds, and then enough clients said, ‘We don’t need daily liquidity; we can have monthly liquidity,’ then the industry would provide that.”
In the long-run he thinks that the lessons learned from Woodford will be good for the fund industry.
“Ultimately, I think market forces work and the industry is matching the demand that’s there. But market participants have to behave properly and some of the participants haven’t been.
“Now that that’s come to light, I think changes will be made and I’m quite sure that all firms are scrutinising what they do. So, from a broader point of view, I think this has been a good event. Clearly it hasn’t been good for some investors that have been caught up in funds that have had to close. But it’s one of those events that probably will help the industry longer term.”
