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John Jackson

Latest News  10/09/2019

Liquidity and the Retail Investor

In the latest article by John Jackson he explains why, when selecting an investment solution, cost matters but so do the regulatory structure and controls.

It is impossible to pick up the money section of a newspaper without seeing some comment on Woodford and the issue of the illiquidity of his fund. I was disappointed to read some articles that appeared to suggest that the UCITS structure has somehow caused the problem. By its nature an open ended fund can be required to liquidate assets quickly and there is a strong argument that illiquid investments should not be held in those structures. The rules permit a small percentage to be held.

“The UCITS “badge” is one of the most highly regarded and trusted in the world.”

It has gained that trust as a result of a framework of rules and regulations that ensure controls around many aspects of the fund such as concentration of holdings, types of assets that can be held, percentages that can be held in single assets and minimum requirements on liquidity of the underlying assets. It is feasible that as a result of the Woodford problems the limits will be tightened, but thank goodness limits were in place.

In addition to the UCITS Fund there is the NURS or Non-UCITS Regulated Fund. These funds are not regulated to such tight limits and are able to hold some assets (eg: open ended property funds) that are simply not sufficiently liquid to be held in the UCITS structure.

However, contrast the discipline of the multi-asset fund in the UCITS fund structure with the other, popular structure - model portfolios managed by third party “DFMs” on platforms. Model portfolios are very easy to establish without the burden of regulation required by a fund. There are no limits on holding size of any underlying investments, no COLL rules and no restriction on less liquid assets as seen by the gating or some of the open ended property funds held in these models following the Brexit vote. The risks are exacerbated by the fact that due to the generally cumbersome administration processes they are often only “rebalanced” quarterly or even less frequently. These large, timetabled dealing events can make it even more difficult to exit from a position that has become less liquid.

So what are the lessons from the Woodford case?:

  1. If liquidity is a concern to you or your client seek out a multi asset UCITS Fund. Whether you invest in one multi asset UCITS Fund or several they will all operate to the same regulatory standards.
  2. If liquidity is a concern but you are more relaxed about risks such as gating then investing in a multi asset NURS that can include open ended property funds becomes possible.
  3. If you wish to access a broad range of assets and wish to leave the active management to a discretionary manager then either “full” discretionary management or MPS services run on the DFM’s own platform become options. In such cases it is prudent to understand how active the management actually is and whether you are locked into a rebalancing cycle.
  4. Consider model portfolios run on platforms by third parties if this is an attractive option to you but these may carry the highest liquidity risks due to the less active management combined with the lack of regulatory limits.  

At the top of this list we have:

The UCITS Fund, where a regulated investment manager undertakes investment within the framework of UCITS rules and is overviewed by the regulated Authorised Corporate Director with all aspects of the fund being overviewed by the regulated Trustee and Depositary of the Fund who has the regulatory responsibility to look after the interest of the investors.

At the bottom of this list there is the regulated discretionary manager who manages a model with no prescribed rules and any overview is undertaken by the Adviser.

When selecting an investment solution, cost matters but so also do the regulatory structure and controls.

John Jackson
Managing Director, Intermediary Business

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