The City regulator is investigating funds worth more than £15bn that have holdings in Neil Woodford’s collapsed investment vehicle as it seeks to prevent the liquidity crisis surrounding the fallen stockpicker from spiralling.
The Financial Conduct Authority is closely monitoring multi-manager funds with holdings in Equity Income — Mr Woodford’s flagship vehicle that was suspended in June — over fears that investors in these products are vulnerable to contagion spreading from the failed fund.
At least 15 UK retail funds are invested in the Woodford vehicle, including popular multi-manager funds run by Hargreaves Lansdown, the UK’s largest fund supermarket, and Quilter Investors, the wealth manager, according to FTfm analysis of Morningstar data.
Of Hargreaves’ six Woodford-exposed multi-manager funds, which together have £6.1bn in assets, three count Equity Income in their top 10 holdings. The fund accounts for as much as 11 per cent of Hargreaves’ £2.6bn Income & Growth fund.
Quilter, which dropped a segregated mandate managed by Mr Woodford this year and switched its holdings into the Equity Income fund, has £8.9bn in multi-manager portfolios exposed to the collapsed fund. The holding represents about 1 per cent of the Quilter portfolios.
Total assets in retail funds that have positions in Equity Income stand at more than £15bn. However, this figure understates the amount of assets that are indirectly exposed to the Woodford fund as it does not capture wealth managers’ discretionary portfolios.
Unlike direct Equity Income fund investors, who were trapped when the fund halted trading in June, investors in the multi-manager funds are free to redeem their cash.
However, continued investor outflows from the multi-manager funds could spiral into a liquidity crunch, since the Woodford fund cannot be sold down to repay investors. In the event of an investor run, the funds would be forced to sell down positions in other funds, increasing the size of their Equity Income holdings. This could ultimately lead the portfolios to halt trading.
Richard Wilson, chief executive officer of Interactive Investor, the UK’s second-largest investment platform, said his company had been contacted twice by the FCA about potential Woodford ripple effects. “[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,” he said.
Interactive Investor has no multi-manager funds exposed to Woodford.
According to Morningstar, two multi-manager funds offered by investment platform The Share Centre have holdings in the failed fund. Other funds exposed to the strategy are the £106m CAF UK Equity, the £24m Gemini Principal Asset Allocation and the £12m Octopus UK Equity funds.
James McManus, investment manager at robo-adviser Nutmeg, said there were “serious questions” about how the multi-manager funds were valuing the Woodford holding. The fund’s liquidators will start selling down holdings in January although investors are unlikely to receive all of their original investment. PJT, one of the fund’s liquidators, recently estimated investors were set to lose about one-third of their savings.
Mr McManus added that the providers with exposure to Woodford needed to take action to protect the interests of long-term investors in their multi-manager funds.
Hargreaves said it expected the Woodford fund to have “limited” impact on its multi-manager funds given it is just one of 60 funds the portfolios invest in. It added that the size of the Woodford fund had fallen as a proportion of its portfolios since the fund’s suspension.
Describing its multi-manager range as “highly liquid”, Hargreaves 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 that the risk of Woodford contagion on their funds was low given the diversified nature of the portfolios. The manager of the Gemini fund could not be reached for comment but its authorised corporate director said it monitored all aspects of the fund’s liquidity daily. The FCA declined to comment.
Outflows from the Hargreaves Income & Growth fund peaked following the Equity Income suspension in June. Although redemptions have since lessened, a net £266m has flowed out of the product during this time, according to Morningstar. Quilter’s Cirilium Balanced and Dynamic multi-manager fund lost a total of £257m since June.