Frozen II: a chance for Woodford investors to learn from their mistakes and let it go!
Last week, investors in Neil Woodford's flagship investment fund received more bad news. They are likely to remain trapped until early December after the frozen fund extended its suspension to sell holdings and pay for customer withdrawals. Ironically, they'll be able to see Disney's much-anticipated Frozen sequel, before they see their funds again. Demonised in the press and subject to investor fury, Mr Woodford has certainly eaten his share of humble pie. However, should he be the only one under scrutiny? While the manager in question should undoubtedly be held responsible for any fund which sees its assets more than halve in the space of two years, one could argue the blame shouldn't just be focused on the man himself, investors also need to shoulder some of the responsibility.
Woodford's Equity Income Fund, as we now know, ploughed money into illiquid assets. The problem is that this created a whole plethora of problems when too many investors, raging about his underperformance, all tried to pull their money out at the same time. There are, of course, always warning signals whenever open-ended funds invest in unlisted assets. That said, it is not like investors were oblivious to the fact that Woodford was putting their money in illiquid assets. The issue here is surely around the fact that investors failed to equip themselves with a way of working out exactly how illiquid these assets were, and more importantly, exactly when to withdraw their cash.
The reality is that, in an investment world that has never been more technologically savvy, investors desperately need regular insight about a fund's investment strategy. It is no good relying on the net asset value of the fund, this makes it almost impossible to understand the intrinsic value behind the fund. Instead, and this is what many caught up in Woodford's woes didn't have access to, investors need an indication of a fund's composition at least once a month. This way, the retired head master living is Sussex currently still paying management fees into a fund that has been frozen, might be able to know how illiquid the assets were in the fund, and then determine in advance whether they needed to withdraw funds.
It all comes down to calculating liquidity risk - which basically means assessing how many days, weeks or even months, are needed to liquidate a fund. Now this is all well and good if the stocks investors hold in a fund are all traded on national exchanges. An investor can comfortably place an order to sell their stocks on the market and after just a few days, all their positions will be liquidated. In contrast, when investing in non-listed equites, an investor needs far more time to seek out a buyer for the assets they are selling. While regulators are forcing more funds to publish more information on liquidity risk, one cannot rely on the rule makers alone.
The truth is that investors should not just request, they must demand greater transparency from their fund manager. This includes detailed insight into the precise positions taken by the fund, and information on the type of exposure the fund has. A major institutional investor putting £500m into a fund will demand more transparency, so why shouldn't the mid-sized and smaller investors?
Regardless of the amount of capital someone may have invested, they need to be able to know what percentage of the investment can be redeemed in one week, six-months, or one year. Some funds will of course refuse to give insight into positions, but these are few and far between. From $50trn a decade ago, to $80trn today, assets under management globally are booming. The only thing is that around $30trn of global assets are held in funds that promise daily liquidity to investors despite investing in potentially illiquid assets. With the likes of Merian Global Investors and Invesco Perpetual heavily invested in illiquid assets, not to mention the recent fall in investor confidence in the latter, Woodford should by no means be seen as an isolated incident.
If the fund stays shut until early December, Woodford stands to make about £8m in fees from investors. While investors may be kicking themselves for not spotting the warning signs earlier, this is a good opportunity to take stock and assess whether they have enough insight to hold their fund managers' feet to the fire. Regardless of the level and type of fund they may be investing in, the individual with a few hundred thousand in an active fund can no longer afford not to have insight into the composition of the overall fund. If fund managers refuse and investors still decide to trust their money with the likes of Woodford, then they only have themselves to blame.
Joseph Cordahi is Investment Management Strategy director at NeoXam
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