Less liquid and faster-growing companies have become temporarily “uninvestable” for some types of investment fund as a result of the fallout from the collapse of Neil Woodford’s flagship fund.
The suspension of Woodford’s Equity Income fund last summer has exacerbated liquidity pressures on other open-ended funds, said Laura Foll, joint manager of closed-ended trust including the Lowland Investment Company plc (LON:LWI) and the Henderson Opportunities Trust PLC (LON:HOT).
Open ended funds, or unit trusts, are becoming virtually “forced sellers” of less liquid assets at knock-down prices, Foll said at a Winterflood Investment Trusts annual conference on Thursday.
This made investment trusts, which are closed-ended and so do not suffer from the same liquidity fears, the natural buyers of these under-valued shares, she said.
Many fund managers have been under pressure to sell less liquid stocks, industry sources revealed, due to fears about becoming “the next Woodford”.
While open-ended funds are typically cautious about holding less liquid assets, since the Woodford crisis several fund managers had revealed that these concerns “have risen up the agenda”, said Nick Britton, head of intermediary communications at the Association of Investment Companies.
One prominent real-world result of the fallout has been the £1bn-plus that has been plucked out of the funds of Woodford protégé Mark Barnett’s three Invesco funds in the past three months due to concerns over liquidity.
The flows out of Barnett’s Income, High Income and UK Strategic Income funds were from the last quarter of 2019, according to Morningstar data.
Before the result of the general election drove an improvement in UK equity sentiment, UK active equity funds had been on track for their worst ever year, with the £3.5bn that flooded out of active equity funds between July and September, the worst quarterly outflows ever according to data from Calastone.
Showing that this was not just a UK problem, UK equity index funds saw inflows in the third quarter and record inflows over a 12 months period to end-September.
Foll said that if the market does not correct the small-cap valuation opportunity, she expected the market would via mergers and acquisitions, citing examples such as Dairy Crest, Manx Telecom and A&J Mucklow last year.