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Woodford fund gating gives ETF providers superior marketing opportunity


Funds imposing a gate, stopping investors from redeeming, were a phenomenon of the hedge fund world during and post the global financial crisis (GFC) in 2008 and brought a huge amount of crippling criticism and a wave of regulation to that sector, which arguably changed it forever.

This week’s news brought the gating issue centre stage with the blocking of redemptions from famous, and now maybe infamous, stock picker Neil Woodford’s Equity Income Fund. A fund that was, on paper at least, a mainstream long only, largely retail fund managed by a well-known star manager.

The fund which had assets of GBP3.7 billion, at its peak, was apparently knocked sideways by a redemption request from Kent County Council of GBP236 million and promptly shut its doors to redemptions. The county council’s actions must have been driven by the fact that the fund has lost 30 per cent over the past two years and apparently contains a portfolio of illiquid stocks, many in unquoted companies. The council’s attempt to take back its money acted as that crucial pebble in an ill-built wall and caused something of a collapse.

Some have tried to defend the fund, or certainly the assets it has invested in. Celene Lee, Principal and Senior Investment Consultant at pensions and employee benefits consulting firm, Buck, commented: “The decision by Kent County Council pension fund to withdraw its GBP236 million investment mandate from the Woodford Equity Income Fund has had damaging consequences, not just for Neil Woodford, but for the fund management industry as a whole.

“This week’s developments highlight the importance of having a regulatory portfolio cap on investing in illiquid assets. However, it’s important to realise that investing in these assets is not, and should not, be considered as unnecessarily risky. Illiquid assets can help investors meet their long-term investment strategy, and also provide potentially higher returns and diversification of their investment portfolio. Clearly, getting the balance right between illiquid and easy-to-sell assets is vital, but for investors who fully understand their investment objectives and appreciate the market and the risks involved, illiquidity should not be a dirty word.”

The repercussions from the fund’s suspension are huge and will heavily affect a largely retail investor base, which is supposed to be the most protected in this new highly regulated post GFC world.

One of the most affected firms is Hargreaves Lansdown, which had been a big supporter of the fund, keeping it on its Wealth 50 preferred list until the last possible moment, literally dropping it only after it was suspended. The firm has now waived its platform fee while the fund’s dealing has been suspended and Hargreaves Lansdown’s Chief Investment Officer Lee Gardhouse has written: “We share the disappointment and frustration investors in Woodford Equity Income feel at this time and would like to apologise to all clients who have been impacted by the recent problems. And, once the dust settles, we will undertake a thorough review of what happened and see what lessons can be learned.”

The lessons to be learned will undoubtedly reverberate throughout the platform-based investment community. The FCA is being called upon and lawyers are circling, aware that litigation can be the only outcome from a situation where fund brokerages wield such power, but have a clear conflict of interest in that they make money out of the funds they support.
The entire debacle has proved a prime opportunity for the ETF industry whose supporters have stepped up to further detail the advantages of ETFs.

Robo-adviser Nutmeg, whose portfolios are entirely based on ETFs, urged the regulator to revisit best buy fund lists, and question whether they are acting in the best interests of consumers.

Nutmeg’s chief investment officer, Shaun Port (pictured), says: “The impact of the trading suspension on Neil Woodford’s Equity Income Fund is much further reaching than just one fund. While investors who bought the Woodford fund based on the recommendations of a best buy list are left wondering when they will be able to redeem their investments, it calls into question the broader appropriateness of best buy fund lists. As the Financial Conduct Authority highlighted in their 2017 study, there are concerns around links between funds on best buy lists and the platform providers as well as their performance over the long-term. It’s time the regulator revisited best buy fund lists and whether they are acting in the best interest of consumers.”

Meanwhile, ETF white labelling firm HANetf published comments under the title: “Wake-up Call”, with Hector McNeil, co-Founder and co-CEO, saying: “The gating of the Woodford fund should be a wakeup call to all investors. We have long argued that intra-day liquidity is a huge advantage that ETFs offer over traditional funds – regardless of market conditions, an investor can trade in and out quickly and get their money back – something possible with the many Equity Income ETFs that are now available.

“Having paid significant fees for underperformance, Woodford’s investors are now having salt rubbed into their open wounds as they cannot get their money back to redeploy. Given regulatory and investor focus is shifting towards value for money and investor protection, this incident could be the wakeup call that catalyses wholesale investor migration towards ETFs. As an industry, we have argued that ETFs are a superior distribution technology because they offer transparency, liquidity and market access at low costs, and it is exactly these features that many Woodford investors now wish they had – the transparency to know about unlisted and illiquid securities risk and the liquidity to trade and exit at a time of their choice.

“The disciplines of running an ETF make a scenario such as this remote. There has been much speculation in the press around ETFs & what would happen in times of volatile markets. It’s interesting that such an event as what has befallen Woodford if it had been in the ETF world would have been seen as catastrophic. ETFs almost universally have liquidity screens to prevent such events and investors should use this event as a wakeup call.

“Following on from Terry Smith’s recent emerging market woes it is very evident that the star fund managers business models are under significant stress and helps highlight the clear benefits of the ETF wrapper.”

Whether ETFs offer a cure-all for the woes of the long only traditional stock picker fund or not, one thing that might well be over for ever is the cult of the star manager.

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