Commentators are urging the Financial Conduct Authority to address liquidity concerns in Ucits funds sooner rather than later as investors are still reeling from a series of high profile crises, including the Woodford Equity Income suspension.
On Monday the regulator rolled out new rules for “certain” open-ended funds investing in illiquid assets.
Under the new guidance managers of non-Ucits retail schemes must provide investors with “clear and prominent information on liquidity risks” and highlight situations in which access to funds may be restricted.
The FCA said the rule change places additional obligations on the fund managers who invest in inherently illiquid assets to make sure they have plans in place to manage liquidity risk and would reduce the likelihood of runs on funds triggering fire sales of assets which it said disadvantages investors.
Ucits excluded despite Woodford blow-up
But the rules do not apply to Ucits funds like Woodford Equity Income, which was suspended in June after it was unable to meet heavy redemption requests.
As more investors withdrew money from the fund, the exposure to unquoted holdings rose well above the regulator’s 10% limit. Around a third of the portfolio was in what the fund’s authorised corporate director Link classified as the hardest assets to trade a month before it froze up.
The FCA said in a statement it had considered “whether there were any lessons” from the Woodford saga that might be relevant to the policy and that the fund’s suspension “underlines the importance of effective liquidity management in open-ended funds more generally”.
Concerns need to be addressed sooner rather than later
AJ Bell head of active portfolios Ryan Hughes said the fact the rule change does not include Ucits funds is understandable to a certain extent given they fell outside the scope of the original consultation.
But he added the FCA needs to address Ucits liquidity concerns “sooner rather than later” given the vast majority of UK investors will have assets tied up in Ucits funds.
“The whole focus on property and infrastructure is one piece of the jigsaw puzzle,” said Hughes. “The key for me is that they get on with that pretty quickly because these issues are existing in the market right now and are facing investors today.”
FCA continues probe of daily dealing funds
The regulator confirmed in Monday’s paper that it and the Bank of England will continue to look into daily-dealing funds holding illiquid assets to minimise financial stability risks and provide better protection to investors.
The major liquidity crises over the past year have all involved, daily-dealing Ucits funds.
Before the Woodford blow-up Gam liquidated its £8.5bn (CHF10.5bn) absolute return bond range after an internal whistleblower sounded the alarm that manager Tim Haywood had been stuffing the portfolios with illiquid bonds. Weeks after Woodford concerns were raised about a potential liquidity crisis at Natixis-backed H2O Asset Management.
The string of liquidity crises has prompted calls for the FCA to look into daily dealing funds holding illiquid assets, with some commentators like SCM Direct co-founder Gina Miller calling for an outright ban.
Pushback
But this has seen some pushback with some claiming that banning less liquid assets will limit investor choice.
“It is very easy to say that everything should be liquid, but that places restrictions on legitimate choice, as does banning of anything non-regulated,” said CWC Research founder Clive Waller. “Experienced investors always knew that property is illiquid. Doesn’t make it bad.
“I understand the advisers’ problems, but if we always look in the rearview mirror, we will eliminate progress and innovation.”
The FCA has expressed a similar sentiment.
“We want people to continue to be able to invest in illiquid assets, such as real estate, through open-ended funds but it is important that they are appropriately protected,” said FCA executive director of strategy and competition Christopher Woolard. “The new rules and guidance are designed to protect the interests of investors particularly during stressed market conditions. This includes those wishing to redeem their holdings, as well as those wishing to remain invested in the fund.
“We also want to make it clear that authorised fund managers are responsible for managing the liquidity risk in their funds and acting in the best interests of investors.”
