The Woodford Equity Income fund was stuck in lots of assets that were hard to sell, and with investors withdrawing cash at a much faster rate than it was going in, and being unable to sell the underlying assets, the fund had to be suspended.
As wealth managers invest in an ever smaller number of funds, so those funds will get larger.
Kelly Prior, investment manager within the multi-manager people team at BMO Asset Management, says one risk is that many funds need to be smaller in size to be able to succeed if they invest in niche areas, and the only way these funds can be both small and commercially viable is to charge higher fees than the industry average, but with the increased focus on fee level, and pressure on active managers to cut fees, the likelihood of such niche, successful investment products coming to market in future is greatly reduced.
Kamal Warraich, investment analyst at Canaccord Genuity Wealth Management, says it is probably best to access niche investment ideas, including micro-cap funds, through investment trusts rather than open-ended funds in order to have some liquidity.
Commenting on the broader question of fund size, he says: “Many wealth managers don’t want to own a large part of a fund because if they have to, rather than want to, sell out of a fund, that could damage long-term relationships with fund management companies, and with fund managers.
"What we are increasingly seeing is the big wealth management houses using segregated mandates to deal with these issues.”
A segregated mandate is a fund created exclusively for one client, with that client able to withdraw all of their money with just a notice period, and is not impacted by the flows of other clients.
Jason Hollands, a managing director at Tilney Smith and Williamson, which with assets of around £55bn is one of the largest fund buyers in the country, says: “If you are managing a sizeable book of assets for clients, allocating into a small fund where you might end up holding a substantial proportion of the assets could be problematic if at some point you wish to exit the fund.
"Having said that, discretionary managers will, however, sometimes be prepared to seed new funds where there is a degree of comfort that it is expected to scale up quickly. Seed money from discretionary managers via founder share classes has become an important source of support for new launches.”
Trust issues
Investment trusts seem to offer a solution to the liquidity conundrum, as they are companies listed on stock exchanges, so an investor can access the cash quickly by simply selling their shares on the open market.
