Terry Smith has launched a fresh assault on the UK’s powerful investment supermarkets, accusing the likes of Hargreaves Lansdown of sowing the seeds of Woodford-style investor runs by propagating a myth of instant liquidity.
The prominent City fund manager, who runs the UK’s largest retail fund, said investment supermarkets had forced fund managers to shoehorn their investment strategies into an instant-access fund format, even when their underlying assets could take weeks or months to sell.
The fund management sector was battered last year by a range of high-profile liquidity crunches at daily traded investment funds, led by Neil Woodford’s now-defunct Equity Income fund. M&G’s £2.5bn property fund and a range of bond funds run by Natixis subsidiary H2O Asset Management were also hit.
The problems prompted calls for changes to so-called Ucits rules that govern retail funds. Mark Carney, the outgoing governor of the Bank of England, famously described such funds as being “built on a lie”.
But Mr Smith pinned the blame on commercial interests rather than regulations. He said that despite there being no requirement in the Ucits directive for funds to provide daily dealing, investment supermarkets had turned the structure into the dominant market practice by refusing to sell funds with less frequent redemption terms.
“There is nothing wrong per se with open-ended funds owning [hard-to-sell] companies,” Mr Smith said in an interview with FTfm. “What is clearly wrong is putting such instruments in a daily dealing fund. But at the moment you can’t list a fund on a platform in the UK unless it’s a daily dealing fund.”
Mr Smith warned the refusal of investment supermarkets to sell funds with monthly or quarterly redemption terms had damaging repercussions, leaving managers of less liquid investment strategies “in the same position of banks faced with a run”.
Ucits rules cap funds’ exposure to unlisted securities at 10 per cent of assets to reduce the likelihood of a liquidity crunch. The Financial Times revealed last week that seven funds, excluding the Woodford fund, had exceeded this limit a total of eight times since June 2017.
Mr Smith said the financial regulator needed to “wake up” to the widespread use of daily dealing funds and force investment platforms to start selling funds with less frequent liquidity. Mr Smith’s fund, Fundsmith Equity, offers daily redemption terms but is mainly invested in large-cap, highly liquid companies.
But the UK’s largest investment supermarkets denied they had refused to list funds with less frequent redemption funds, saying that their offering reflected customer demand.
Hargreaves Lansdown, Interactive Investor and AJ Bell mainly sell daily dealing funds but said they did not insist on this format. Barclays and Fidelity exclusively sell daily dealing funds.
Mr Smith has locked horns with Hargreaves Lansdown before. Last year, he hit out at the FTSE 100-listed group’s “best buy” list of recommended funds, which he said was based on managers’ willingness to offer discounts rather than their performance.
The Woodford crisis shone an unforgiving light on the cosy relationships between investment supermarkets and fund managers. Just three months before the scandal broke, the Financial Conduct Authority had given the platforms a clean bill of health.
