The downfall of Neil Woodford has been one of the biggest investment stories of recent years.
The golden boy of fund management was forced to freeze his flagship Woodford Income Fund, before the plug was pulled entirely, with investors still waiting to get some of their money back once the assets in the fund are sold off in their entirety.
As someone who fell for the hype and followed the crowd in backing Woodford, the collapse of his funds has hit me directly.
But it’s worth recognising that apparently even those who didn’t invest in Woodford may have seen the value of their investments dented by the situation.
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Stock market minnows
Investment firm Numis last week published its annual Smaller Companies Index, an in-depth look at how smaller listed firms performed last year.
And it’s striking that while small firms as a whole had a strong year, outperforming the FTSE All-Share by 6%, the smallest of small firms ‒ the micro-caps ‒ didn’t do anywhere near as well, actually underperforming the All-Share.
In other words, while small firms ‒ those in the bottom 10% in terms of value ‒ had an excellent year, the minnows ‒ those in the bottom 2% ‒ were a turnoff for investors.
And it may be directly down to Woodford.
The report states: “This relatively weak performance coincided with the suspension of Woodford Investment Management’s high-profile fund, with its large exposure to illiquid stocks.
"As a result, liquidity became the watchword for 2019 as investors became more sensitive to their exposures to the less liquid stocks at the minnows end of the market.”
So investors who were spooked by the liquidity issues faced by Woodford felt that they may struggle to sell off large holdings in these smaller firms, and so opted to look elsewhere.
Bad news, at least in the short term, if you have a substantial holding in these firms and have held onto it.
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The Woodford fallout continues
It’s not just these micro-caps that are continuing to feel the ramifications of the collapse of the Woodford funds though.
Mark Barnett took over the Invesco funds previously run by Woodford, but investors are ditching the funds in their droves, in no small part due to the similarity in the assets held by the fund to Woodford’s now-defunct fund.
Analysis by the Telegraph found that investors had pulled out a whopping £750 million from the £5.7billion fund in the last three months of 2019, with the fund now having halved in size since 2018.
If investors carry on at this rate, the fund will have real trouble handing back their cash as early as November, the report suggests.
Liquidity is clearly the name of the game.
Giving fund managers a slap on the wrist
Liquidity worries were also at the heart of a slapdown delivered to fund managers, large and small, this week from the financial regulator.
The FCA wrote to the bosses of investment funds to warn them that they need to raise their game.
The letter didn’t name any manager specifically but said that overall governance of funds “generally falls below our expectations”, adding that funds offered to normal investors “do not consistently deliver good value, frequently due to failure to identify and manage conflicts of interest”.
The influence of the Woodford fallout on the letter is pretty clear too, given that it has a whole section on managing liquidity.
For example, it makes clear that fund managers are responsible for ensuring “effective liquidity management” of their funds, and reminding managers that it has already laid out its expectations over just how liquid these funds need to be.
It also warns that if it discovers potential liquidity issues in funds, it will force managers to rectify the situation, pronto.
Only time will tell just how on the ball the regulator is with this situation, and whether investors are right to be wary of putting their money into funds that have backed illiquid assets.
All I know is that I’ll be sticking to trackers from here on out. You may not enjoy the results that you get from a ‘superstar’ fund manager, but slow and steady will do me just fine.
This article does not constitute financial advice. You should speak to a professional financial advisor before engaging in any transaction.