Holly Black: Welcome to the Morningstar Series "Ask The Expert". I'm Holly Black with me in the studio is Jon Miller, he's head of fund research for Morningstar. Hello.
Jonathan Miller: Hello Holly.
Black: So you are here today to talk to us about what happens when a fund suspends trading.
Miller: So yes. So it’s actually very rare, I think we’ve got to make that point to start with and ultimately what it is, is investors can't buy, can’t sell, in effect it's frozen. And what we are then left with is the movements of the underlying assets we still have in the portfolio. They can go up, they can go down, the fund will still be reporting a price, but ultimately it's frozen until further notice on how you can access your money or even invest again. Black: So it seems quite last resort, why would a fund manager do this?
Miller: It’s all down to liquidity and you are right it is the last resort when ultimately it comes down to, the taps are on in terms of investors wanting to take money out. The fund manager and his or her team, in terms of trying to unwind the assets, sell them in the market – there is a mismatch. Now you got third parties involved in and around a fund. So you invest with a fund manager, but there is administrators and third parties and what they are there to to do is assure that the fund can still have some liquidity. So there can be some safeguarding that actually can force the hand of the manager to actually make sure the liquidity profile is extreme can be frozen and then investors best interest are looked after in that case.
Black: And obviously I guess each time it's different, but how long does it typically last?
Miller: It depends on the liquidity profile of the underlying assets and the market and there is lots of things at play. It can be a few days; it can extend to months. Really, it depends on the individual circumstances and when it's all in play, you know, as I said, the kind of people called the custodian and third parties, administrators will help make sure things have moved on in a sequential manner and that investors are treated fairly and you'll even get the regulator probably having a look – or having a closer eye on steps being taken.
Black: So, we've had quite a high profile fund suspension this week, Woodford Equity Income Fund. What's led to this?
Miller: Well, equity income on the Woodford side, what he's been looking at or his thoughts on the world have been much more down the market cap (scale), as we say. So he's been investing in medium and smaller companies as well as having unquoted stocks in his portfolio. So all those companies are UK based in general and ultimately investors have been taking money out of his fund non-stop for quite a few months, probably couple of years now. Now he stood firm in his views on where he wants to shape the fund, but that oversight of risk and illiquidity has come to a head now, and with the third parties involved they made a decision that actually you can start getting bad prices in the market for the things you want to sell, because you've got liquidity traps and when people know you are forced seller it exacerbates a situation of getting a worst price. So all those things put together have ultimately meant that that fund's been suspended.
Black: And it’s not a common thing. Are there any other examples of funds have suspended in recent years?
Miller: It’s not common at all what we've seen a couple of times is property funds where there you've got daily dealings. So you, I, people on the street, people who are watching this can put £100 a month into a fund, but ultimately you need a building to buy and sell that can take months to happen. So there is a big illiquidity profile on daily dealing funds which we don’t like in the property space. We've been quite vocal about the mismatch there. Here for equities it's probably the first one we can think of across the teams, scratching our heads. So it's very rare we think investors' best interests are looked after, but ultimately it's that liquidity mismatch that happens in the unquoted as well as stocks where Woodford Investment Management holds a significant stake in the companies.
So when the market knows that person wants to unwind positions, as I said it becomes exacerbated situation on getting bad prices in the market. So it safeguards investors, how long it could last weeks, more on months I think in this case?
Black: And what does it mean for investors, presumably don’t panic even when it does open?
Miller: Yeah, I mean the fund is going to have to have different profile when it’s open. Because people are going to redeem probably from day one. We don’t know the extent of it, and you know ultimately Neil Woodford's had some big calls in the past that he's got right, a few he's got wrong but made it up in the future. Here the portfolio is quite extreme when some unquoted companies get sold, cash is going to be kept and also the market cap profile is going to have to change to have more liquid assets when the fund reopens. It's a kind of wait and see but it will be very different from what it is today.
Black: Thanks so much for your time.
Miller: Pleasure.
Black: Thanks for joining us.
