Suspended Equity Income fund 40% illiquid.

02/07/2019.

Nearly half of the Equity Income fund run by leading UK fund manager Neil Woodford was invested in “illiquid” stocks by the end of 2018, it has emerged one month after the fund was suspended.

Mr. Woodford suspended trading in his flagship fund in early June after an increasing number of investors sought to redeem their investments, with £560m withdrawn from the fund over just four weeks.

It has now emerged that just 60% of the fund money was invested in “level one securities,” with the remainder held in illiquid stocks.

20% of the fund’s assets were invested in unquoted stocks, twice the 10% maximum amount which open-ended funds are permitted to own in such companies.

The remaining 20% of fund money was invested in less liquid stocks.

Concerns grow over illiquid funds

The fund’s suspension and subsequent revelations regarding its lack of liquidity have underlined wider issues with funds investing in illiquid assets.

AJ Bell’s Ryan Hughes notes that Equity Income’s case illustrates “the risks that come with investing in illiquid assets while offering daily liquidity to investors.”

Last week another London-based asset manager, H20, lost over £2bn in a single day, after investors sought to redeem their money quickly following a scare over illiquid bonds.

Wealth manager Alan Miller of SCM Direct terms Equity Income’s lack of liquidity “breath-taking” given its open-ended nature, adding that the apparent lack of oversight raises “so many alarm bells.”

Auditor Grant Thornton has also faced criticism for not issuing any warning that the fund was insufficiently liquid when overseeing the fund’s annual report.

Kent County Council, one of the fund’s largest investors, was unable to withdraw its £263m from the fund before trading was suspended, with a council spokesperson saying that the local authority was “disappointed that, as a major investor…[it] did not receive [any] prior notification” regarding the suspension.

The council added that it was unclear whether “the decision to suspend trading was linked to the council’s decision to redeem.”

Bank of England urges change amid “systemic” threat

Bank of England governor Mark Carney has also expressed concern regarding the economic threats posed by funds dealing in highly illiquid stock.

Speaking with MPs on the Treasury select committee last week, Mr. Carney said that these funds were “built on a lie, which is that you can have daily liquidity for assets that fundamentally aren’t liquid.”

The Bank of England governor called for greater investment regulation to combat this problem, warning: “This is a big deal. You can see something that could be systemic.”

In a bid to avoid the potentially significant economic consequences of major funds being unable to repay investors, Mr. Carney said that England’s central bank would liaise with the Financial Conduct Authority and seek to work with global institutions to ensure that funds are required to “better align…the redemption terms with the actual liquidity of the underlying investment.”