While liquidity has always been an important consideration for fund selectors, last year the issue was thrust firmly into the spotlight for several reasons and particularly in the case of open-ended funds.
The fund previously known as the Woodford Equity Income fund (renamed the LF Equity Income fund) was gated in June 2019 amid increasing redemptions and significant exposure to unquoted holdings, while M&G was forced to suspend its Property Portfolio fund on 4 December following “unusually high and sustained outflows” in the lead up to the General Election and amid ongoing Brexit uncertainty.
Nearly all the asset management representatives we interviewed for The Wealth Managers Review 2020 reported an increase in calls regarding their fund ranges’ liquidity with the almost unprecedented suspension of the Woodford fund prompting many fund buyers to review their potential exposure to more illiquid funds. Clients wanted to know how long it would take to get their assets back and who were their fellow investors in portfolios.
The Bank of England was also alarmed and in its annual Financial Stability Report, released in December 2019, it said liquidity mismatches in open-ended funds, such as that seen in the property sector and in the case of the Woodford Equity Income fund, pose a threat to financial stability and could “amplify shocks in the financial system”, and flagged the problems could be extended to beyond property and unquoted holdings into fixed income.
In our research, DFMs said they largely preferred to measure liquidity by the number of days it would take to liquidate the portfolio. For example, the percentage of the portfolio that could be liquidated over ascending timeframes. Ideally, investors want to see that portfolios can be 90% liquidated within 10 days (but that would clearly differ by asset class).
Additionally, as a result of last year’s problems, a number of DFMs reported a closer focus on the risk committee or compliance team when it comes to judging a fund’s liquidity, and making sure there is independence.
We also found that DFMs explored more thoroughly the company culture and financial strength of the business as a result and 10% of our survey respondents admitted they had made changes to their investment processes after the Woodford Equity Income fund suspension.
As we enter 2020, there is a feeling that the asset management industry will never quite be the same after last year’s event and many will believe quite rightly so.
There are still lessons to be learned and processes to be put in place to ensure this kind of issue does not happen again and, clearly, this is not the last we have heard on liquidity from the regulator or the Bank of England. We appear to be just at the beginning of what is hopefully a not-so-steep learning curve on a more modern approach to managing liquidity.
To find out more about The Wealth Managers Review 2020 click here