Colm Fagan
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There's an interesting article in today's Irish Times about the fall from grace of Neil Woodford, who was once seen as the UK's answer to Warren Buffett.
One particular aspect of this case which wasn't mentioned in the article, but which is getting considerable attention in the UK and which is causing wider soul-searching within the asset management sector, is the dangers associated with holding significant amounts of illiquid or unquoted investments in open-ended funds.
Open-ended funds are very much the norm in Ireland. The fund managers (normally insurance companies) assemble a number of investments and put them in a fund, which they offer to retail investors. The price per unit is the total value of the fund divided by the number of units.
Everything works well if the fund's assets can be realised easily, at prices close to those used to calculate the fund's unit prices. This isn't always the case, especially for property funds.
Mr Woodford's problems weren't confined to property. In an effort to boost performance, he invested in stocks with poor liquidity. When the proverbial hit the fan, other managers saw that he would be a forced seller and shorted stocks in which he had significant holdings, thus pushing their prices down further. As an aside, he made matters worse for himself by advertising transparency as one of his virtues. He had let the world know the stocks in which he had major holdings, so making things easier for the short sellers.
The Woodford episode also highlights the vulnerability of open ended property funds. There is a massive gap between the quoted unit prices of property funds and the prices at which publicly quoted property companies change hands in the market. For example, I have shares in a (closed end) UK property company, which are currently trading at less than 60% of the company's net asset value. In other words, if the company were broken up, its borrowings repaid, and the properties remaining transferred to an insurance company's property fund, the managers could realise a profit of the 40% gap between the value at which they trade when they're part of a quoted closed end property company and the price they would command as units in an open-ended property fund. That doesn't look right. Something must give.
One particular aspect of this case which wasn't mentioned in the article, but which is getting considerable attention in the UK and which is causing wider soul-searching within the asset management sector, is the dangers associated with holding significant amounts of illiquid or unquoted investments in open-ended funds.
Open-ended funds are very much the norm in Ireland. The fund managers (normally insurance companies) assemble a number of investments and put them in a fund, which they offer to retail investors. The price per unit is the total value of the fund divided by the number of units.
Everything works well if the fund's assets can be realised easily, at prices close to those used to calculate the fund's unit prices. This isn't always the case, especially for property funds.
Mr Woodford's problems weren't confined to property. In an effort to boost performance, he invested in stocks with poor liquidity. When the proverbial hit the fan, other managers saw that he would be a forced seller and shorted stocks in which he had significant holdings, thus pushing their prices down further. As an aside, he made matters worse for himself by advertising transparency as one of his virtues. He had let the world know the stocks in which he had major holdings, so making things easier for the short sellers.
The Woodford episode also highlights the vulnerability of open ended property funds. There is a massive gap between the quoted unit prices of property funds and the prices at which publicly quoted property companies change hands in the market. For example, I have shares in a (closed end) UK property company, which are currently trading at less than 60% of the company's net asset value. In other words, if the company were broken up, its borrowings repaid, and the properties remaining transferred to an insurance company's property fund, the managers could realise a profit of the 40% gap between the value at which they trade when they're part of a quoted closed end property company and the price they would command as units in an open-ended property fund. That doesn't look right. Something must give.
