The good in gating.

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The wonder of the gating of the Woodford Equity Income Fund is that it happened in peacetime. There is no financial storm, the crisis is as random of the fall of Icarus in Breughel’s famous painting.

There’s no doubt that Woodford is right to gate, it’s the only way to protect the remaining investors from the markets, hopefully the fund can find sufficient liquidity to salvage itself (and Woodford).

The alignment of interests between fund manager and unit holders is important. No doubt there are lawyers sharpening their knives but unit holders have a lot more to lose by fighting their manager than by co-operating.

Now, another star manager – Nick  Train , is warning that the risks of underperformance could happen to his fund – Lindsell Train.  I suspect speaking out now is as much a  ploy to encourage his investors to stay than to encourage investors – overly dependent on his fund’s outperformance – to turn down the dial. Nonetheless, it’s good to hear a fund manager in something other than “asset-grabbing” mode.

The link between manager and investor is important and it’s that link which got broken with Woodford. Terry Smith still holds his investors in the palm of his hand and Nick Train is obviously looking to emulate.

That link is severed by intermediation and this may be the longer-term message of the Woodford crisis. The big losers of this – in terms of loss of shareholder value are Hargreaves Lansdown and other funds which took responsibility for the promotion of Woodford. I suspect that there are many heads rolling – and not just there.

The problem of platforms is not just that they disintermediate the relationship between investor and owner but that they become both dating agencies and divorce lawyers. Effectively they are a kind of marriage guidance service in the meantime.

It’s a strange kind of service that introduces, manages and fires and it’s small wonder that Terry Smith has been very shy of getting too close to the platforms.

The good in gating

What is good for investors is not necessarily good for platforms. Although SJP did not directly offer Woodford Funds , they did offer Woodford as a manager and when the gat came down, Woodford left the building. Hargreaves similarly stopped recommending WEI only when it was gated.

By implication , HL and SHP and Openwork and even Kent CC are kicking off against the protection of remaining members. They can only see the negative PR in gating, not the good it does.

Which really begs the question – are these platforms really acting for the member or their shareholders- which is precisely where I’d be starting my inquiry if I was the FCA.

Risk should be taken- where there’s a risk budget.

Robin Powell and other evidence-based investors have for some time been pointing to the risks of active managers losing liquidity. A friend of mine said just this to Neil Woodford a couple of years back.

Will investors in future accept that active equity funds can be as vulnerable to redemptions as any other? I expect they will not, that they will see Woodford as a “one-off” and demonise the manager for his conviction. Meanwhile will other active managers cease investing for any purpose than to make money? Will we  see a flight to closet tracking?

The appointment of Columbia Threadneedle, a house that has long spoken out against star managers, may be a sign of things to come.

But if it is , and we see active management becoming another branch of risk management, then where will we be able to take risks?

The wake up call for investors is precisely articulated by Nick Train when warning against dependency on his returns. Risk needs to be embraced but only when there is a risk budget.

The illiquidity premium

Longer term investors should be prepared for occassional gating, indeed they should welcome it. It is what gives them the illiquidity premium.

If Woodford was promoting his funds as being relatively illiquid, then occassional gating should be part of the risk warnings- I am aware that the T’s and C’s of the fund mentioned this option.

But investors don’t read the T’s and C’s of funds they invest in and that’s the problem. It takes a Terry Smith or a Neil Train to tell them how it is and I hope that is what happens over the next few months.

Far from running scared of gating, fund managers should promote their capacity to gate – to protect short-term investors.  If gating frightens off short-term investors and speculators – that is a good thing; so long as everyone knows the rules of the game


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to The good in gating.

  1. John Mather says:

    There is an argument to be had for side pocketing the illiquid assets which would have allowed an exit from liquid funds while avoiding the forced sale of illiquid stocks This obsession with instant liquidity is the cause of many distortions in both manager, regulator and investor behaviour

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