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Seven Ucits funds face Woodford-style liquidity risk, warns MSCI

Handful of large equity funds have potential to be in similar situation to Woodford Equity Income Fund, says group


David Robinson

Global index provider MSCI has warned that seven large equity Ucits funds could struggle to meet large redemptions due to high levels of illiquid stocks in their portfolios.

The research firm analysed around 400 Ucits funds with assets of more than €1bn, selecting funds deemed to have a profile similar to the still-gated Woodford Equity Income fund.

British fund manager Neil Woodford stopped investors from withdrawing money from his flagship €4.1bn fund earlier last month after it racked up huge losses amid excessive exposure to illiquid assets.

Applying its LiquidityMetrics tool, MSCI found that seven funds out of around 40O breached a 15% limit in terms of illiquid assets, when checking them against a 5% trading scenario.

MSCI applied the US Securities and Exchange Commission’s (SEC) 15% restriction on illiquid assets in open-ended funds noting that the Ucits regulation do not specify such restrictions.

MSCI noted that the requirement for twice monthly redemptions and the fact that many funds offer daily trading should discourage most managers running very illiquid portfolios.

Laszlo Hollo, vice president at MSCI’s risk management research team said: “When the Woodford Equity Income Fund suspended redemptions on June 3, 2019, it showed how, when a fund’s liquidity profile is misaligned with its shareholder profile and redemption constraints, a single large redemption request can trigger gating.

“Should institutional investors be worried about liquidity constraints from other open-end funds? Based on our analysis, a handful of large equity Ucits funds had the potential to find themselves in a situation similar to that of the Woodford Equity Income Fund.”

Handful of funds a risk

The research found that the vast majority of these portfolios were very liquid, but that a handful of funds warranted further examination.

Seven of the funds breached the SEC’s 15% illiquid-holding limit, and approximately 1% of them had less than half of their holdings in the highly liquid category.

It said that, in short, the liquidity profile of these funds may be misaligned with anticipated redemption requests with a risk they could face trouble, were a large investor to redeem.

Hollo added: “Even though most of the analysed Ucits funds seemed sufficiently liquid, there were a handful with relatively large exposure to liquidity risk. The Woodford fund highlighted the importance of keeping an eye on a fund’s liquidity profile as a key component of managing risk.”