Cover Story
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[ LIQUIDITY CRISIS ]
Rebecca Jones investigates whether the suspension of
Woodford Equity Income could be the “canary in the coal
mine” of a bigger liquidity crisis
Parched!
T
he current predicament of
the now gated Woodford
Equity Income fund may
end up being passed off
as an isolated incident. An unusual
liquidity crisis was propelled by a
powerful manager’s penchant for
early-stage companies, combined with
unwavering support from the UK’s
biggest fund platform – both of which
have seen their reputations suffer.
However, such an assessment may be
misguided. As we know, Woodford’s
dilemma was exacerbated by mass
withdrawals from his once £10bn
fund – which forced him to sell his
liquid assets en-masse, increasing the
concentration of his illiquid positions.
It was a similar case for GAM during
its liquidity crunch last year and at the
time of writing, H20 appears to be in
the same boat. Woodford is not alone
in losing money – and lots of it.
Fund run
According to figures from the
Investment Association (IA), UK-
domiciled funds shed £5.5bn in
2018 – the first time annual flows
FE TRUSTNET
have been negative since 1999.
Even in 2008 – the worst financial
crisis since 1929 – funds managed
to squeak £202m of net sales. And
this – chillingly – isn’t a patch on the
£16.4bn of net losses we’ve seen in
the 12 months to April this year.
All of this reverses an epic flow of
money that, since the financial crisis,
has seen assets under management
in UK-domiciled funds grow by
£792bn to more than £1.2trn as a
constant flow of freshly printed
money has suppressed interest
rates and turned cash savers into
investors. In comparison, total fund
AUM grew by just £107bn between
1999 and 2008.
While fund managers have been
readily receiving this cash, less
consideration has been given to
whether they would be able to give
it back in a hurry – particularly if
there is a Northern Rock-style run on
their capital. Governor of the Bank
of England Mark Carney recently
warned this is a very real possibility.
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