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Woodford and Gam blow-ups spark calls for reform

The implosion of the Woodford Equity Income fund in the UK and Gam’s absolute return bond fund (ARBF) range in Switzerland within a year of each other has prompted calls for the industry to get over its obsession with daily dealing and consider weekly or monthly traded funds.

UK Financial Conduct Authority boss Andrew Bailey has this week suggested the regulator might take a look at banning daily withdrawals from funds holding illiquid assets, and will look at forcing funds to keep assets in jurisdictions chosen by investors.

“The stranglehold daily dealing vehicles have is unhealthy,” says Jamie Carter, chairman of think tank New City Initiative and CEO of Oldfield Partners.

It is “incredibly difficult” to attract capital, particularly in the retail and wholesale spaces, without offering daily dealing.” Carter says, adding strategies are “shoehorned” into these vehicles in order to reach the masses.

“Asset managers, advisers, platforms, and regulators need to work together to break the fixation on daily dealing, which is the lowest common denominator, if we ever truly want to generate long-term patient capital.”

Monthly-trades ‘not a dirty word’

While most Ucits funds permit investors to retrieve their money daily, weekly or monthly traded funds are not unheard of. Neuberger Berman launched a collateralised loan obligation (CLO) Income fund last year which offers fortnightly dealing.

Gbi2 managing director Graham Bentley finds it odd that the industry touts long-term investing and yet simultaneously promotes daily-dealing funds. “The only reason you do that is because the whole system is designed to market daily traded funds.”

Ryan Hughes, head of active portfolios at AJ Bell, agrees it is high time the industry has a conversation with itself to judge whether making a fund daily traded is the right approach for every asset class.

“There’s a liquidity mismatch that’s occurring and we have to deal with it. Maybe the future is having funds that are weekly or monthly traded and that shouldn’t be seen as a dirty word. We have to accept that if you want to profit from the illiquidity premium, it comes with a trade-off and the trade-off should be probably that you can’t get your money back when you want to.”

Illiquid withdrawal notice period

Bentley suggests that funds with more illiquid assets have a three-month notice period for withdrawals like a term-deposit at a bank or building society. Investors who are willing to stick it out for a short period of time before getting their money back could be compensated by a lower annual management charge, for example, he says.

“I see no reason at all why people wouldn’t want to get involved in funds that operated on the same basis,” he says. “That would then allow the manager to be slightly more prone to use less liquid stocks … and oils the wheels of capitalism so to speak while not doing a disservice to your investors.”

If Gam’s ARBF funds had had a notice period for withdrawals the Swiss manager would have been less of a target for short-sellers, says Bentley. “The impact on the company may have proved to have been very different, certainly less punitive.”

Daily trades ‘the norm’

The problem is that daily trading is still seen as the norm.

Hughes says he has spoken to several fixed income managers who say they wish their funds were not daily traded. “These conversations are taking place, but the trouble is that commercially it’s absolutely not an appealing proposition.”

“If you were a small cap equity fund in the IA sector and you said, ‘I’m going to make my fund monthly traded’ and you were the only one, I think the chances of you getting decent flow after you made that move is very, very limited.”

From and administrative and operational standpoint monthly-traded products would place a burden on investment platforms, says Bentley.

“Let’s suppose you had to make three months’ notice about a withdrawal. Effectively what the platform has to do is store up data on those requests and hold the money in a separate account to make sure they’ve portioned out the money that is going to be sold from the underlying portfolio itself.”

“Now if the whole industry demanded, banging their fists on the table, that these funds were available, and you had the likes of the bigger companies, the Blackrock’s of this world, moving in that direction, then the distributors would have to follow suit,” says Bentley.

“But currently, certainly up until now, there’s been no motivation to do that.”

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Kristen McGachey

Kristen joined Last Word Media and the world of financial journalism in April 2016, leaving behind a career in a legal publishing firm as a senior researcher turned assistant editor. This native Angelino...

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