Sententia Articles July 2019

In this Issue


The Woodford Fund Closure – The very real dangers of illiquidity

Suspension of the Woodford Equity Income Fund trapped £3.7bn investor’s money and whipped up a media storm. Once solid as a rock, Neil Woodford’s reputation has taken a massive hit – proving that even the best of us can make mistakes. The regulator has responded, and mechanisms in place to protect investors are once again under scrutiny. Read more.

Intergenerational Differences

The FCA has been focusing on making advice accessible and affordable for all generations, and trying to tackle what they call the ‘advice gap’. This article looks at the FCA review, and at the contributing survey; older people are getting richer, and richer people are getting older. Read more.

Putting the RDR back on the Radar: Plan now drawn up for the FCA’s evaluation

Following RDR and FAMR, the FCA has been looking for feedback from the industry. This article introduces the regulator’s evaluation of the impact of those regimes. Read more.


The Woodford Fund Closure – The very real dangers of illiquidity

The investment limelight last month was hogged by one of the industry’s long term ‘star fund managers’…but not for reasons he would have liked. In this article we explore the recent Woodford suspension in the context of increasing consumer concern about liquidity issues.

Strong performance

Neil Woodford experienced a long period of success. Having spent 25 years at Invesco Perpetual and seeing strong returns when managing both the Invesco Perpetual Income Fund and Invesco Perpetual High Income Fund, he became one of the most well-known Fund Managers in the UK. Many Institutional and Retail investors therefore followed him when he moved in 2014 to set up his own company, Woodford Investment Management and his flagship fund, Woodford Equity Income.

Weaker performance and questions over asset composition

In 2019, after an extended period of poor performance, many began to question the underlying asset composition of the Fund. In March it was calculated that the fund held nearly 18% of its assets in unquoted stocks. Woodford has been forced to reduce this amount as the overall size of the Fund reduced due to outflows and poor performance. Unquoted stocks are not listed on the Stock Exchange and are not available for public trading. Because of the corporate structures and process of buying and selling shares in these companies, it can be very difficult to liquidate them at short notice. However, there are many benefits to investing in unquoted stocks; first and foremost, they are usually young companies with large growth potential. Neil Woodford has previously performed very well with such stocks; his investment into AJ Bell in 2007 worth £11.7m was made when it was an unquoted company, and was recently sold by Invesco for £144m.


The recent suspension

On Monday 3 June news broke that Woodford’s flagship fund, the LF Woodford Equity Income Fund, had suspended trading with immediate effect after a spike in withdrawals. Hysteria grew as the news spread that Kent County Council, which had invested around £238m in the fund, had served notice to Woodford of its intention to withdraw the money. The Council had been assessing the performance of the fund since March 2019 and had planned to vote on whether or not to redeem its holdings on 21 June 2019. However, due to increasing outflows from the fund they decided to pursue its redemption on the 3 June.

Upon suspension, the stake held by Kent County Council in the Woodford Fund represented a holding of circa 6%. They gave a statement to the effect that they weren’t aware their redemption request might cause a suspension.

The 2016 suspensions

This is not the first time we’ve seen large fund suspensions in the market. In July 2016 the market came to a halt when £18bn worth of Commercial Property funds were suspended on the London Stock Exchange. This was shortly after the Brexit vote. The suspensions were largely triggered by a slowdown in construction and a fear that property prices and rental values would also fall. Fund Managers decided to suspend trading in order to protect investors. There was of course the added complication that commercial property cannot be sold quickly and therefore an attempt to do so by managers would have meant potentially selling underlying assets at an unnecessary loss. The M&G Property Portfolio Feeder Fund (for example) lost circa 8% during the 2016-2017 period. Since then the fund has recovered well and made circa 7% between 2017-2018.

The liquidity issue

Liquidity is increasingly becoming an issue. As we saw after the crisis of the Property Fund Suspensions in 2016, when the underlying assets cannot easily be sold and there is an influx of redemption requests, these types of funds have no choice but to suspend trading until they can reach the required liquidity. To avoid a repeat of the 2016 scenario, property funds have now applied a strategy which includes holding a much higher percentage in cash to fund outflows, giving them a safety blanket. The below table represents the current sector composition of the M&G Property Portfolio Feeder Fund, showing an 8% cash holding:





Cash and Equiv.






Managed Funds


Real Estate Investment Trusts


Data correct as at 17/06/2019.

More severely, the Standard Life UK Real Estate Feeder Fund has over 20% in cash, as shown below:





Cash and Equiv.


Data correct at as 17/06/2019.

The high cash composition has both positives and negatives. In one sense it demonstrates that fund managers are taking sensible steps to try to avoid the 2016 scenario. However, it also means they’re holding less actual property in the portfolio and are therefore not able to commit completely to the composition that was designed to meet the fund’s objectives. This is a fair interim solution but in the long term would damage the opportunities both for the manager and investors.

The FCA perspective

The FCA recognises suspensions as an internationally legitimate tool via IOSCO guidelines and sees them as effective in protecting investors against the effects of enforced sales. However, they leave funds inaccessible until the suspension is lifted. In the Woodford case circa £3.7bn of investor money was left trapped in the fund. The FCA have acknowledged that liquidity in collective investments is a concern and that whilst suspending funds offers more time and control for the fund manager to correct a fund’s liquidity situation, more measures are needed to protect investors and achieve better outcomes. This was highlighted after the 2016 property fund crisis, after which they published a Consultation Paper – CP 18-27 discussing the need to implement new measures to achieve better outcomes for investors.

Indeed, the FCA is seeking to make changes to the Handbook in order to improve the ways in which liquidity issues are dealt with. Some of the proposed changes include: the suspension of dealings in units; improving the quality of liquidity risk management (how a manager should go about evaluating the need to suspend a fund); increased disclosure i.e. adding an ‘identifier’ to the name of a fund; disclosure in the fund prospectus about the risk management process; and a risk warning in promotions to retail clients.  The FCA will be releasing a final policy statement and rules later in 2019.

At Novia we continue to monitor the situation closely. Our Model Portfolio Manager tool (MPM) does not queue trades in this scenario and therefore ensures that investors are not stuck with a price three weeks later (for example) that would give them little control of the situation. Instead, we give advisers and discretionary fund managers the option to clone the model, or update the current model to enable trading to continue without the affected asset. For further details, please see our Corporate Actions page here, or contact your local Account Manager.



Intergenerational Differences

The FCA has said that as well as looking at how the market has evolved since RDR and FAMR, it’s important that the sector works well in the future; that consumers and the market are changing rapidly, as technology, employment patterns and inter-generational challenges change the way consumers interact with financial services.

With this in mind, the FCA has a published a discussion paper (DP) on the changing financial needs of consumers for different age groups. It focusses the debate on the intergenerational challenges and different financial needs and resources of different generations. There is a particular emphasis on retirement and pensions, which we have focused on within this article.

The DP looks at patterns of wealth using data on demographics and socio-economic trends to help identify the financial needs of three generations of consumers by the years they were born: Baby Boomers (born 1946 – 1965); Generation X (1966 – 1980); and Millennials (1981 – 2000). The output demonstrates that different generations have very different needs.

Analysis from the Office for National Statistics Wealth and Assets Survey has been used, looking at how wealth levels of people of the same age changed between 2006/08 and 2014/16. Results showed that for an individual aged 40 to 50, total wealth was less than that of people of the same age a decade ago.


Change in median total wealth between 2006 to 08 and 2014 to 16:



What the analysis showed is that the peak age for total wealth has gone up. The 2006-2008 cohort were wealthiest in the 55-64 bracket, whereas the 2014-2016 cohort were wealthiest at 60-69.

The peak wealth itself is significantly higher, too (see the right hand vertical scale). People at retirement age (i.e. 65) were approximately £78,000 wealthier than people the same age a decade ago. The discussion paper noted that falling interest rates tend to boost asset prices (e.g. financial assets including Defined Contribution pension pots) and have positive impact on the Net Present Value (NPV) of Defined Benefit pensions.



Change in median pension wealth between 2006 to 08 and 2014 to 16:



One of the driving factors behind increased pension wealth is greater use by retirees of the pension freedoms introduced in 2015, and fewer annuity purchases. Annuity sales declined over 80% between 2014 to 2017, with growing numbers of people choosing to withdraw their pension pots as cash or opt for drawdown. As a result, far fewer people in retirement are using their pension savings to buy a guaranteed income.

According to the FCA’s study:

Baby boomers (those born between 1946 and 1965) have often accumulated a decent amount of retirement savings but need to know how best to make use of the Pension Freedoms, and they may need different products to help them benefit from Pension Freedoms.

Generation X (those born between 1966 and 1980) are often struggling to set aside enough money for their pension or to save for emergencies, leaving them prone to financial shocks.

Millennials (born between 1981 and 2000) can be affected by insecure employment and higher debt, which lead to a reduced ability to save for retirement. Millennials are expected to accumulate significantly lower levels of pension wealth compared to Baby Boomers.

So many consumers, especially the young, are not saving enough money for retirement and would benefit from services helping them to engage more with long-term pension savings. 

The FCA anticipates that their review will identify ways in which the changing needs and circumstances of consumers could be better met by financial services providers. The consultation closes on 1 August.

To see the full contents, go to



Putting the RDR back on the Radar:

Plan now drawn up for the FCA’s evaluation

The RDR reforms were a big deal in the retail finance world, and they’ve undoubtedly been very good for both investors and adviser firms. The latter were freed from reliance on initial commissions from product providers, giving them a more powerful position and putting them in a better place to serve the needs of their clients. Novia has been aligned with RDR requirements from launch, and its ethos sits at the heart of our operation, so our ears are pricked up now that the FCA has fully drawn up its plan for a review to evaluate RDR and FAMR. Yes, the FCA is reviewing life post-RDR this year as they promised, albeit with a two-year delay. We thought it worth bringing this up on the radar here as the outcomes of the review will likely be of interest across the industry.


A quick recap

The RDR took effect in 2012 and made significant changes to the way investment products were distributed to retail consumers in the UK. The aim, in the words of the FCA, was to ‘establish a more resilient, effective and attractive retail investment market that consumers had confidence in and trusted’.

In 2015 FAMR was launched jointly by the FCA and HM Treasury with the objective of identifying ways to make the UK’s financial advice market work better for consumers. It looked at the accessibility of advice and guidance available to help consumers with their financial decisions. 

With the above regulations in play, the main outcomes of the market review for platforms and advisers were the new distinction between "restricted" and "independent" financial advice (where, in the latter case, an adviser must consider all retail investment products available on the market); a ban on receiving commission from product providers; new rules on the disclosure of adviser charges; changes to the way services are communicated to consumers and the banning of payments by providers to investment platforms as well as cash rebates paid by providers to consumers for new business.

What do the FCA plan to look at?

So here we are amidst the FCA’s 2019 review. They want to evaluate the success of the RDR and FAMR initiatives, and to review their impact on the market to date and assess how the market may develop in the future. As well as a ‘Call for Input’ asking for feedback on its approach and a survey on a small number of adviser firms, the regulatory body have already drawn up a clear picture of key areas they will be looking at, detailed here. To summarise briefly, some of these areas are:

  •  Access to advice and guidance services

They will look at affordability for the different consumer groups and consider how better value for money might be provided. So as expected, the FCA will be looking at the extent to which there is an “advice gap” and how might this be closed. This has been one of the ongoing criticisms: while clients who have the requisite resources to seek advice are surely faring better, it’s said to be more difficult for those less well-off to access the advice that could be important for them. The pension freedoms of 2015 is highlighted as a possible concern here, as it creates a greater need for advice.

  •  Meeting consumer needs for advice and guidance – now and in the future

They are considering consumer needs, both in terms of how well these needs are met now and what the trends for change are going forward from here, and how these needs should be met.  Notably, these trends include demographic change; housing market trends; changes to pension planning; low interest rates and high levels of debt and technological advancements.

  •  The role of regulation

They are considering the role of regulation. Are there any ways in which regulations are counterproductive? How is effective regulation of the area best achieved, including in relation to barriers to competition? They are also considering the impact of recent regulatory changes such as MiFID II, PRIIPs and the IDD.

The report concludes with outcomes and indicators for the RDR and FAMR to measure their success, all of which is also being supported by HM Treasury. For more information see Annex 1 and Annex 3.  

The final review is to be published in 2020. We keenly await the results, and will of course aim to remain aligned with the best outcomes for advisers and investors. Watch this space!