Research from the Association of Investment Companies (AIC) has revealed advisers are paying more attention to the liquidity of investments and less to fund manager reputation in light of the collapse of Woodford Investment Management.
The most common lessons advisers have learned from Woodford are to give more consideration to liquidity when choosing investments (47%), and to be less trusting of a fund manager’s reputation (41%).
Some 75% have changed their behaviour in some way as a result of Woodford. The most common changes are to check the level of exposure to unquoted companies in funds (37%), discount fund manager reputation in investment decisions (29%), and read fund factsheets (23%) and prospectuses (10%) in greater detail.
There is widespread agreement that there are insufficient controls on how funds operate where they hold illiquid assets, with 72% agreeing with this while just 10% disagree.
Almost seven-in-10 (69%) of respondents believe the Financial Conduct Authority should impose stronger investor protections where illiquid assets are held in funds.
Majority had held exposure to Woodford at some point
Of the 106 advisers surveyed, the majority (58%) had at some point recommended to clients or invested on their behalf in Woodford Equity Income. Of these, 84% had clients who were impacted by the fund’s suspension in June 2019.
The collapse of Woodford IM has left advisers less trusting of the investment industry. Most of them (54%) said their trust in the industry had been weakened, and among those advisers who had clients impacted by the suspension, 62% trusted the industry less than before.
When asked about the main contributors to the collapse of Woodford IM, the two most commonly cited reasons were the high proportion of unquoted companies (62%) followed by liquidity issues (55%).
Attitude to open-ended property funds
The research also revealed that advisers are now more cautious about investing in open-ended funds with direct investments in property, which recently suffered from suspensions during the height of the Covid pandemic.
Of all respondents, 69% had at some point recommended that clients invest in an open-ended property fund. But only 12% currently recommend such funds, and just 11% said they would definitely do so in the future.
Richard Stone, chief executive of the AIC, said: “Our research shows that the suspension of Woodford Equity Income came as a surprise to most advisers, as it did to private investors. It has left them a lot more cautious about trusting a fund manager’s reputation or investing in a fund that has exposure to illiquid assets.
“Advisers clearly identify the Woodford fund’s exposure to unquoted companies as the number one reason behind its suspension and eventual failure. Whenever open-ended funds hold hard-to-sell assets, there will be a risk of such problems.
“The proposed long-term asset fund needs to be carefully designed to minimise such risks and, as an untested product, it should not be widely distributed until it has proved itself through an economic cycle.”
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