Funds could be banned from investing in unlisted stocks, loans and property following the high-profile suspension of star manager Neil Woodford’s Equity Income fund earlier this week, experts have warned.
The Financial Conduct Authority (FCA), the City regulator, is expected to undertake a review of all “illiquid” assets as a result of the news, leaving hundreds of fund managers at risk of change.
The regulator has conducted investigations into property funds, which had to “gate” (or suspend dealing) in 2016 following the Brexit vote when investors tried to withdraw more cash than the funds were able to pay back.
Mr Woodford’s high allocation to unlisted companies, which are typically difficult to trade quickly, caused a similar problem when investors pulled their money out in large swathes.
Funds are already barred from allocating more than 10pc of their portfolio to these holdings, but this limit proved to be insufficient for investors now trapped in the fund.
Ben Conway of Hawksmoor Investment Management said: “Limiting unlisted companies to 10pc was thought to be enough but what this has shown is that when you get a run on a fund 10pc can quickly grow if you can’t sell them.”
James Calder, of City Asset Management, added: “I would be very surprised if these conversations weren’t taking place in Canary Wharf right now. Whatever they do there has to be a proper Stewards’ enquiry about what happened.”
Experts said the ban could affect more than just unlisted companies. Thomas Becket, of Psigma Investment Management, warned that open-ended funds could be barred from holding any illiquid assets.
“The chances are that this is being looked at as we speak as this is a headline-grabbing incident and people have been caught behind the curve with regards to the risks that it obviously posed,” he said.
In its consultation from October, the FCA said it was pleased with how the property fund suspensions were handled in 2016, but said improvements could be made.
Following the latest news, Mr Becket said these funds could come back under scrutiny.
Mr Conway added that the probe could even extend to funds that invest in fixed income assets.
Funds are able to invest up to 10pc in loans – illiquid bonds that are not easily traded – much in the same way stock investors buy unlisted companies.
“A lot of fixed income funds do own positions in loans that are not liquid. Any ban would have to be applied across the board,” he said.
“It would be a lot cleaner to say that in an open-ended fund you should only own assets that match the liquidity you are offering to investors.”
The FCA declined to comment.
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