The Investment Association is due to announce a new long-term asset fund structure that will limit when people can sell their investments in order to avoid the liquidity problems that have beset the Woodford Equity Income fund.

Bad performance and concerns over Woodford’s fund’s portfolio structure led to mass withdrawals. This in turn led to liquidity problems. Woodford was unable to sell stocks fast enough at reasonable valuations to pay out to those cashing in without breaching regulations that limit the illiquid holdings in the Woodford Equity Income portfolio to 10%.

AJ Bell head of active portfolios Ryan Hughes commented: “If there is one thing the industry can learn from the suspension of the Woodford Equity Income fund it is that there is a mismatch between the daily liquidity funds currently offer customers and the actual liquidity in the underlying assets. Whilst fund suspensions are very rare and we shouldn’t get carried away, it sounds like report due out from the Investment Association could be incredibly well timed.

“The problem is that it has become the norm for funds to offer daily trading and one of the challenges for the industry is going to be resetting customer expectations that they can sell their investments immediately. There will need to be effective education around why having a longer notice period for selling investments offers a degree of customer protection when investing in certain asset types.  People accept it for certain savings accounts in return for a higher interest rate, so it is certainly possible for investments too.”

Hughes argued that “moving away from daily traded funds would allow fund managers to make genuine long term investments because they will have much greater visibility of when they might need to sell underlying assets to meet customer redemptions”.

Share Story: