The gating of the Woodford Equity Income Fund raises questions around professionalism and ethics in fund management.
CFA UK has previously highlighted the benefits to investors of being able to access illiquid assets via open-ended investment funds. However, while such funds help to maintain the democratic nature of finance by allowing retail investors access to opportunities that would otherwise only be available to professional investors, they also expose those investors to risks that are not always well understood.
In these cases, there should be clear and prominent disclosures about liquidity risk in fund literature. In addition, fund managers should carefully model, monitor and manage liquidity risk, fulfilling their responsibilities to act with reasonable care and to exercise prudent judgement in looking after their clients’ money1.
Good liquidity risk management policies and procedures are important for the functioning of financial markets. However, gating, and other redemption management tools should be used sparingly, on a temporary basis, only in exceptional circumstances and always fairly in the best interests of all fund investors.
Further, the decision to implement a redemption gate should be informed by our code of ethics under which members are required to act with integrity, competence, diligence and respect and to place the interests of their clients ahead of their own.
In a 2017 discussion paper, the FCA asked if it should intervene directly in liquidity management. We indicated then – and continue to believe – that the regulator should not intervene directly in fund governance. Their role is to regulate, not to govern. However, it is critically important that funds are well governed and, as we noted at the time of the FCA’s Asset Management Market Study release2 , ‘There’s been too little independent oversight of the way in which investment vehicles are managed’. Strengthening the governance requirements [as the study proposed and as has since been done] – dealing with the root cause rather than with the symptoms – will improve client outcomes.
Says Will Goodhart, chief executive at CFA UK: ‘The comments made above explain some of the principles that should be applied in managing and governing funds. Whether these principles are implemented and effective will depend a great deal on a firm’s culture and governance. The gating of the Woodford fund is unusual as it has not occurred at a time of market stress, but it should still cause every investment management leader to ask themselves some key questions: Do we have the right governance processes and controls in place? Do we have the right culture of challenge in place to allow these processes to work? Are our actions aligned with our purpose and is our purpose client-centric? If they can’t answer these questions positively, then they should refresh their culture, processes and controls to set.things right.