Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Jon Miller. He is Head of Manager Research at Morningstar. Hello.
Jonathan Miller: Hi, Holly.
Black: So, it's not the first time that we've got together to discuss Neil Woodford and the Woodford Equity Income Fund, but we are actually a year on from when you first came in to talk about the fact that the fund had been suspended. And investors who were trapped in that fund are still waiting to get the last of their money back. So, can you give us just a rundown of where we are today?
Miller: That's right, Holly. It's a pretty amazing thing. We're a year on and so much has happened, but still that was an important event in investors' savings and their confidence in the fund. So, a year down the line the most illiquid part of the assets are sitting in the fund on the side and those assets are trying to be sold off by a party that was entrusted to look after that. Clearly, they are illiquid which means that's going to be tough and take time. And that's where we are today. That's a small amount of money. It's still waiting to come back to investors. A lot has happened. Most of the money has come out, but they are still some frozen elements. When it's going to happen? Who knows? But it does show that the use of illiquids and how unquoted stocks are used in open-ended funds for daily dealing raises serious questions and it's something that clearly we look at closely when we're monitoring the portfolios.
Black: Well, that is it. Liquidity became the buzzword of last summer with the closure of this fund. Do you think there's been any progress within the wider industry on this? I know it's something that your analyst team thinks about a lot.
Miller: Actually, in general, when we're looking across equity funds in the market available to UK investors, we don't see a massive preponderance of unquoted or illiquid assets. So, we think that this particular instance was generally a bit of a one-off in how this was approached. A manager who had built a strong track record elsewhere when you become an owner of your company and you are the one calling the shots and have oversights on pretty much all the processes, they are things we look at closely in terms of investment culture and who pulls the trigger and who calls the shots.
We have liquidity analysis and I think it's important to share that liquidity can be looked at in different ways. It's the size of the fund today and how you can sell those holdings if need be. Also, the amount of free float you own of the stocks, so how much percentage of the shares do you own outright? So, if you own a lot of the shares in a company, clearly, you are the one who is going to move the market when you're trying to sell some of those stocks in the market. So, that's another thing we look at as a part of the liquidity conundrum. And also, funds that might have good track records over short timeframes and how they can scale that up and if that profile of the funds can it continue when it's $100 million today and it's potentially a few billion somewhere down the line. So, you need to have a multi-faceted approach in how you pull the bits together to really get a handle on the liquidity and (move up) to look at that analysis we carry out.
Black: And I suppose another big issue out of this for the industry is this culture of the star manager where the fund manager's name holds enough weight that investors will give their money over to that fund without maybe doing the necessary research as to how suitable it is and what it's really investing in?
Miller: Within that if there is a success and the manager has made a name elsewhere, clearly, assets can follow when they start up their new fund. Now, with Neil Woodford, we knew how impressive his track record was. He did hold some unquoted in the past and he made a market call that made him think there will be a recovery in the U.K. and that made him push down the market cap profile of the fund as well as holding the illiquids. Plus the outflows, there was a bit of a big storm in effect that took place.
But for us, when you look at these potentially smaller groups of owner-managed, we want to find out more about the processes around capacity – who looks after the operations and risk on that side. Too much say from the "star fund manager" we don't think is good. So, again, we are looking at the asset management firm and that's some of the bits we want to find out about to see if there's enough rigid structures in place to keep tabs on that side.
We think more broadly as well when we're looking at some of the bigger fund groups and where you do have named fund managers on the door and the fact sheet, that star manager culture is disappearing somewhat where you see co-managers being appointed, deputy managers. We need the analysts that are part of the analyst bank to find out more about how decisions are made. So, I think what we are seeing there in some of those larger funds, is more access to some of the people in and around the team. So, while there is a manager on the tin, there's actually more going on in and around the investment decision making and there again when we are doing our qualitative analysis, they are the bits we always try piece together, but I think you are seeing more broadly the kind of prominence of the team coming out more in full.
Black: Jon, thank you so much for your time. For Morningstar, I'm Holly Black.
