There Could Be Another Woodford-Like Liquidity Crisis, MSCI Warns

Some European liquid alt funds have liquidity profiles that do not match their daily liquidity promises, according to MSCI.

(Dhiraj Singh/Bloomberg)

(Dhiraj Singh/Bloomberg)

The Woodford Equity Income Fund generated headlines — and a regulatory investigation — in June when it suspended redemptions in its flagship equity fund. But Woodford isn’t the only fund with a liquidity mismatch problem, according to investment research firm MSCI.

According to an analysis published by the firm on Thursday, a group of large equity UCITS funds could find themselves in a similar situation to Woodford, owing to a mismatch between their redemption terms and the liquidity of their underlying securities. UCITs funds — the acronym stands for undertakings for the collective investment of transferable securities fund — are Europe’s version of liquid alt mutual funds.

“When the Woodford Equity Income Fund suspended redemptions on June 3, 2019, it showed how, when a fund’s liquidity profile is misaligned with its shareholder profile and redemption constraints, a single large redemption request can trigger gating,” wrote Laszlo Hollo, a vice president on the risk management and liquidity core research team, in a blog post outlining the results of the analysis.

Hollo and MSCI analyzed UCITS funds with more than €1 billion ($1.1 billion) under management that primarily invest in equities, similar to the Woodford Equity fund.

UCITS funds with a liquidity mismatch are of particular concern to Hollo. According to his report, mutual funds in the United States are not able to hold more than 15 percent of their investments in illiquid assets. This is not the case for UCITS, which are simply required to allow redemptions at least twice monthly, according to the report.

MSCI applied the Securities and Exchange Commission’s regulations for U.S. funds to the UCITS funds it analyzed to determine their liquidity profiles.

Hollo found that most of the funds analyzed were highly liquid. However, seven of the funds analyzed breached the SEC’s liquidity limit, according to the research. What’s more, Hollo found that about one percent of them had less than half of their holdings in highly liquid assets.

“In short, the liquidity profile of these funds may be misaligned with anticipated redemption requests,” according to the report.

Hollo compared the liquidity profiles of the 15 least liquid UCITS funds to Woodford’s fund. While Hollo’s research shows that none had liquidity issues that reached the level of Woodford, several came close.

The least liquid UCITS fund Hollo analyzed had nearly 40 percent of its assets in illiquid assets and roughly 25 percent in highly liquid assets. This is compared with Woodford, which Hollo said had 85 percent of its assets in illiquid holdings as of December 31, 2018.

A spokesperson for Woodford contested the liquidity claims.

“The MSCI claim is based on a theoretical model and the reality in the market is rather different,” the spokesperson said via email Friday. “To define stocks that trade millions of pounds a day as illiquid illustrates the constraints in the model.”

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A spokesperson for MSCI did not return an email seeking comment Friday. Still, the group’s concerns about liquidity mismatch are clear.

“Misaligned liquidity can be a risk for both institutional investors and fund managers,” according to the report. “For institutional investors, a potential liquidity mismatch may prevent them from withdrawing their capital upon request, while suspension of withdrawals may harm a fund manager’s reputation.”