Fund managers should be involved to warn investors about assets that are difficult to sell.
Fund managers will be forced to issue clear warnings to customers investing in hard-to-sell assets to protect them from shock suspensions similar to the gating of Neil Woodford’s flagship fund.
The Financial Conduct Authority’s rules, announced on Monday, will also require certain fund managers to draw up plans outlining how they would deal with an unexpected spike in the number of customers demanding to withdraw their cash.
Woodford’s flagship fund was suspended in June after it was overwhelmed by customer withdrawals following a series of bad market bets. Woodford Equity Income Fund remains suspended.
Woodford apologised to customers of his stock market-traded fund, Woodford Patient Capital Trust, which has dropped in value since June.
“Shareholders have endured an extremely disappointing six-month period, for which I am very sorry. While shareholders can be forgiven for thinking there are no positives, I continue to believe that the majority of the businesses we have invested in are making good progress, in line with our pre-agreed milestones,” he said.
His comments were published on Monday alongside WPCT’s half-year results, which showed the fund’s total value fell by 19% in the six months to 30 June from £807m to £654m. Since then, it has dropped a further 9.7% to £591m.
Susan Searle, the fund’s chair, said: “This has undoubtedly been the most challenging period for the company since it floated in 2015 … We have already taken a number of decisive and proactive measures following the gating of the LF Woodford Equity Income Fund and remain focused on taking the necessary actions to support the future value of the company’s portfolio.”
The listed fund is still considering whether to dump Woodford as its portfolio manager and said it was speaking to potential replacements.
“This process can take time and ultimately the board’s decision will be that which is in the best interests of protecting long-term value for shareholders,” Searle said.
The FCA regulations, which will come into force from September 2020, primarily concern open-ended property funds, which investors can easily buy into and sell out of, without restrictions. But those funds can run into trouble if there is a surge in redemptions, as property investments are not as easily sold for cash as other liquid assets such as stocks.
The rules were drawn up following the gating of UK property funds in 2016, when panicked investors started to pull their cash after the Brexit vote. But the release was delayed so regulators could take a closer look the circumstances that led to the Woodford Equity Income Fund’s suspension.
While the regulations do not directly apply to Woodford, which is focused on investments in stocks rather than property, the FCA said the gating episode highlighted the importance of properly managing hard-to-sell assets held in openly traded funds.