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Smaller shares "uninvestable" for some funds over fear of becoming next Woodford

Open ended funds, or unit trusts, are becoming virtually “forced sellers” of less liquid assets at knock-down prices, one fund manager has said

Neil Woodford
Neil Woodford's unit trust was gated in June

Less liquid and faster-growing companies have become temporarily “uninvestable” for some types of investment fund as a result of the fallout from the collapse of Neil Woodford’s flagship fund.

The suspension of Woodford’s Equity Income fund last summer has exacerbated liquidity pressures on other open-ended funds, said Laura Foll, joint manager of closed-ended trust including the Lowland Investment Company plc (LON:LWI) and the Henderson Opportunities Trust PLC (LON:HOT).

READ: New funds will allow long-term investments without Woodford-like liquidity problems

Open ended funds, or unit trusts, are becoming virtually “forced sellers” of less liquid assets at knock-down prices, Foll said at a Winterflood Investment Trusts annual conference on Thursday. 

This made investment trusts, which are closed-ended and so do not suffer from the same liquidity fears, the natural buyers of these under-valued shares, she said.

Foll said that if the market does not correct the small-cap valuation opportunity, she expected the market would via mergers and acquisitions, citing examples such as Dairy Crest, Manx Telecom and A&J Mucklow last year.

Many fund managers have been under pressure to sell less liquid stocks, industry sources revealed, due to fears about becoming “the next Woodford”.

While open-ended funds are typically cautious about holding less liquid assets, since the Woodford crisis several fund managers had revealed that these concerns “have risen up the agenda”, said Nick Britton, head of intermediary communications at the Association of Investment Companies.

Invesco exodus

One prominent real-world result of the fallout has been the £1bn-plus that investors have withdrawn from Woodford protégé Mark Barnett’s three Invesco funds in the last three months of the year, according to Morningstar data, amid concerns over liquidity.

That meant a whopping £2.7bn had been plucked out of the Invesco Income, High Income and UK Strategic Income funds over the course of 2019.

In November, Morningstar downgraded Barnett's funds as it felt their "sizeable overweight" in small and micro-cap companies could make it difficult for the fund to respond to investor withdrawals.

The following month, Barnett, who took over from Woodford when he left Invesco in 2014, was sacked from running the Edinburgh Investment Trust (LON:EDIN), where he had overseen an underperformance for the past three years.

Barnett responds

On Friday, Barnett sent a letter to investors arguing that the liquidity of his funds had improved of late.

“That a very small proportion of stocks may prove to be less liquid than others is inevitable. However, we continue to manage the funds, fully cognisant of the demands of a continually changing environment, with the aim of delivering the best possible outcome for customers,” he said. 

Barnett added that liquidity “has for many years been a significant area of consideration" in how the portfolios have been managed.

“The funds are mature funds and have for many years been in net outflow. Managing liquidity is not new to us: it is an aspect of fund management in which we have significant experience and well-established processes and procedures."

Showing the wider shape of the funds market before the general election drove an improvement in sentiment, UK active equity funds had been on track for their worst ever year, with £3.5bn flooding out of active equity funds between July and September, according to data from Calastone, which was the worst ever quarterly outflows.

However, the story about UK funds is not that simple, as UK equity index funds saw inflows in the third quarter and record inflows over a 12 months period to end-September.

Quick facts: Lowland Investment Company plc

Price: 920 GBX

Market: LSE
Market Cap: £248.57 m

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