On Wednesday the Financial Conduct Authority (FCA) released a statement confirming it was looking into some of Woodford’s unquoted holdings which had been listed on The International Stock Exchange (Tise) in Guernsey.
Under EU rules a Ucits fund is allowed to hold up to 10% of its portfolio in transferable securities which are not dealt on an ‘eligible market’.
The regulator said: “The Ucits Directive permits an authorised fund manager, after consultation with and notification to the fund’s depositary, to decide that a non-EEA market is eligible on the basis of various factors such as regular operation, openness, liquidity and has adequate arrangements for the unimpeded transmission of income and capital to investors.”
"Should illiquid assets ever be allowed into a fund which allows daily dealing?"
“The FCA expects any decision to list a fund’s assets to be in compliance with the relevant rules required by the Ucits Directive to ensure the fund’s assets remain sufficiently liquid and diversified.”
Guernsey shifts the blame
In response Tise said that some have interpreted the FCA’s move as an investigation into Guernsey’s stock exchange.
Fiona Le Poidevin, chief executive of The International Stock Exchange Group, the parent of The International Stock Exchange Authority which operates Tise, said: “The International Stock Exchange Group and its subsidiary The International Stock Exchange Authority, wish to ensure that there is no lack of clarity in this situation.
“Specifically, The International Stock Exchange Authority is not aware of any investigation, nor of any basis for such. It is important to note that The International Stock Exchange Authority made several attempts to contact the FCA back in April 2019 but with no initial response, finally securing a call with them on 8 May 2019.
“The International Stock Exchange Authority proactively engaged with the FCA in the spirit of regulatory cooperation but subsequently was given no prior warning of the FCA statement or its content.
“The LF Woodford Equity Income Fund is not listed on Tise and not within The International Stock Exchange Authority’s regulatory remit, being a UK fund and regulated by the FCA. The International Stock Exchange Authority only has a remit for certain securities listed on Tise where the LF Woodford Equity Income Fund is an investor.
She added: “However, The International Stock Exchange Authority will of course communicate with and support the FCA further, as and if required.”
Critiques from left and right
But Tise is not the only one clapping back at the UK regulator.
Former UK City minister, Paul Myners, did not hold back while talking to BBC Radio 4’s Today programme on Friday.
“We have the classic combination, in the Woodford incident, of what we’ve seen in so many other financial failures, which is multiple weaknesses in performance by different layers,” he said.
“Woodford was a star fund manager, he was given far too much freedom. And in the background we have the FCA who look like the people in white suits on ‘Line of Duty’ – the scene of crime inspectors who arrive after the damage has been done, and did not anticipate what was happening even though there were clear warning signs at Woodford that things were going badly.
“The FCA is looking [at open ended funds] pretty belatedly. There is a fundamental question: Should illiquid assets ever be allowed into a fund which allows daily dealing?
“An equity fund is not an ATM, it’s not something you can put your card in and get your cash out tomorrow. People shouldn’t be investing in equity funds on that way, and regulation shouldn’t allow daily dealing, they should require a notice.
Not the only fund
“But Woodford also runs other funds and they are continuing to sell the same shares that are in the Woodford Equity Income Fund,” Myners added.
“So, this is putting those public investors in a very bad space. The FCA doesn’t seem to have done anything to ask questions about that. The FCA should seriously question whether Woodford should be allowed to release any of its portfolios to other managers.
“Woodford held the same shares across all of its portfolios, and now you’ve got this sudden panic, he’s dumping his investments and so are other mangers who hold the same stocks, and those shares are being driven down to ridiculous low prices; and the people who are losing out are the end investors.
“The professionals are okay, the regulator will give itself two years to carry out a review of what went wrong, and the same risks will continue of allowing illiquid assets to be put in portfolios which are treated as though they are liquid.”
Omnis latest to drop Woodford
Over the last few days, Woodford’s flagship fund has been dropped by several firms including Hargreaves Lansdown – which has dropped it from its Wealth 50 and waved the fees for the fund – and also Kent City Council. Wealth manager St James’s Place’s (SJP) also pulled £3.5bn in segregated client mandates from the beleaguered manager.
The latest firm to take action is Omnis Investments, the wealth management business of Openwork, which said it had replaced Woodford Investment Management as manager of its £330m ($420m, €371m) Omnis Income & Growth Fund.
The firm has been looking at potential managers since May and said it is at “an advanced stage with a final decision expected shortly”, it said.
But Omnis did clarify that its fund is completely separate from Woodford Equity Income Fund and that none of its assets under management are held by Woodford Investment Management.
Confidence in the portfolio
“We have been working hard with the Omnis investment team over recent months to ensure that the Omnis Income & Growth Fund is delivering to its mandate and have the utmost confidence in the value of portfolio and the underlying investments within it,” said Mike Morrow, wealth and platform director at Openwork.
“Omnis use of segregated fund mandates means advisers and their clients benefit from a diversified blended fund approach. They provide a range of portfolios which have no exposure to the Omnis Income & Growth Fund should advisers and their clients wish to consider alternative options for their investments.
“Openwork will be providing regular updates to advisers and their clients to ensure they are kept fully informed.”