10 December 2019
•
The UK's Financial Conduct Authority (FCA) is currently investigating funds worth more than £15bn that have holdings in the collapsed Woodford Equity Income fund (WEIF) as it seeks to prevent a liquidity crisis.
The FCA is closely monitoring multi-manager funds that have holdings in WEIF over contagion fears for investors.
At least 15 UK retail funds are invested in WEIF, including multiple multi-manager funds from Hargreaves Lansdown (HL) and Quilter Investors, according to FTfm analysis of Morningstar data.
The FCA had specific questions about the Woodford story in order to understand the situation across the UK [and] where the trail of contagion is."
HL's six funds exposed to WEIF total £6.1bn in assets, three of which hold Woodford's failed vehicle in their top ten holdings. The £2.6bn Income & Growth fund counts WEIF as 11% of its total holdings.
Quilter, which dropped a segregated mandate managed by Woodford to invest in WEIF, has £8.9bn in multi-manager portfolios exposed to that fund. WEIF accounts for roughly 1% of the Quilter funds.
Total assets in retail funds that count WEIF as a holding stand at more than £15bn, although this figure underestimates assets indirectly exposed to the fund as it does not include wealth managers' discretionary portfolios.
Unlike those who invested directly in the failed vehicle, whose investments were trapped when the fund was suspended in June, those invested in these multi-manager funds are free to redeem their cash.
However, there are fears continued and sustained outflows could result in a liquidity crunch as WEIF cannot be sold down to repay investors. If an investor run was to occur, the funds would be forced to sell down positions in other funds, increasing their WEIF holdings, which could ultimately lead to those portfolios to suspend trading.
Richard Wilson, CEO of Interactive Investor, which has no multi-manager funds exposed to WEIF, said his company had been contacted twice by the FCA in regards to contagion risk: "[The FCA] had specific questions about the Woodford story in order to understand the situation across the UK [and] where the trail of contagion is."
According to Morningstar, two multi-manager funds offered by The Share Centre have holdings in WEIF. Other funds exposed include CAF UK Equity (£106m), Gemini Principal Asset Allocation (£24m) and Octopus UK Equity (£12m).
'Serious questions'
James McManus, investment manager at Nutmeg, said there were "serious questions" regarding how exposed multi-manager funds were valuing WEIF.
He added that providers with exposure to Woodford needed to take action to protect the interests of long-term investors in their funds.
HL said it expected WEIF to have a "limited" impact on its exposed funds, given it is one of 60 holdings, adding that the size of the fund has fallen as a proportion of its portfolios since the June suspension.
Describing its multi-manager range as "highly liquid", HL said redemptions would be "easily met" first from cash and second from selling down holdings that had done well.
Quilter, The Share Centre and Octopus Investments said the risk of Woodford contagion was low due to the diversified nature of the portfolios.
The FCA declined to comment.
Outflows from the HL Income & Growth funds peaked following the June suspension, and while redemptions has since lessened, a net £266m of outflows have been recorded since June, according to Morningstar.
Quilter's Cirilium Balanced and Dynamic fund lost a total of £257m since June.
This article was first published by Investment Week, a sister title to International Investment
Subscribe to International Investment's free, twice-daily, newsletter
