Many investment professionals were promoting the Woodford Equity Income fund to investors, so what are the practical implications of the gating debacle for the retail channel?
Platforum data on direct platform select lists shows that at the start of 2018, Woodford Equity Income appeared on seven platform shortlists. Three of those chose to drop the fund at various intervals in 2018 with four continuing to promote it in 2019.
Hargreaves Lansdown, perhaps the most loyal supporter, has seen its share price drop 15% on the back of the association. Its credibility to select the best funds for clients has been dented.
Advisers also have clients invested in the fund, many of those holding it within model portfolios – either built in-house or outsourced to a DFM. The pitfalls of funds with unquoted assets will now be clearer to those building their own.
Rebalancing model portfolios also requires liquidity in the funds used, regardless of whether the client has appetite for some liquidity risk.
Investment trusts are the better vehicle for holding such assets, but these are infrequently used by advisers specifically for this lack of liquidity and inability to be fractionality traded within models. The RDR levelled the playing field for investment trusts by sweeping away fund commissions but, for advisers, they remain a niche product which they are unlikely to recommend to clients.
Investment trusts have traditionally been used by wealth managers in bespoke portfolios for wealthy clients. Increasingly direct platforms are the primary route to market, but the DIY investors concerned are old, wealthy and experienced… not some new breed of millennial digital investor.
Lessons about the dangers of holding illiquid assets in open-ended funds should have been learned in the post-Brexit referendum property fund crisis. However, if most retail investors are steered away from investing in illiquid assets, there’s a danger that they will be prevented from getting their hands on the good stuff. That wouldn’t be a good consumer outcome either.
Our upcoming UK D2C Market Update will look at how investment trust distribution is evolving in the D2C channel.