The scandal surrounding the gating of the Woodford Equity Income Fund (WEIF) has exposed the often overlooked but vital role of the authorised corporate director (ACD).
ACD functions may be kept in house by investment houses or, as in the case of the WEIF, delegated to external providers such as Link Asset Services.
The role of the ACDs is to make sure that funds are run in the best interest of investors and that the rules are followed.
Patrick Foley-Brickley, managing director at asset servicing firm Maitland (which provides ACD services), said that fund administrators who offer the fiduciary oversight services of an ACD will be examining the Woodford debacle to see what lessons can be learned from the episode.
Foley-Brickley pointed out that the fund prospectus of the WEIF makes it clear, as did the fund’s Key Investor Information Document (KIID: a simplified description of the fund aimed at non-professional investors), that the fund would invest in unlisted companies as well as overseas entities.
Investors were also clearly warned that “there may be occasions when there is an increased risk that a position cannot be liquidated in a timely manner at a reasonable price”.
In addition, potential investors were told that the fund intended to invest in small companies and that this would involve higher risk and be subject to greater volatility than investing in well-established blue-chip companies.
The breaches of the 10% limit of holdings in unlisted securities were almost certainly “inadvertent” when they first occurred, rather than “advertent” breaches, Foley-Brickley said.
The distinction is important as a fund that inadvertently breaks above the 10% limit, as imposed by EU Ucits rules, is permitted up to six months to wind down the position.
By contrast an “advertent” breach of the limit would require a fund to take immediate action to reduce the holding of unapproved securities and could also be required to provide compensation to investors.
“What may have been a very acceptable 3, 4 or 5% exposure in unapproved securities has, because the fund value has come down so rapidly, shot up proportionally above the 10% limit,” said Foley-Brickley.
“However, there is no doubt the fund has underperformed, and it appears that many people invested into the Woodford fund based purely on his reputation and 27-year track record without giving due regard to the investment policy and risk warnings set out in the fund documentation.
“But performance has been disappointing and inevitably if you don’t perform people are going to take their money elsewhere – and it is the rate of redemption that has caused the issue to escalate to this point.”
The decision to suspend will not have been taken lightly, said Foley-Brickley. “However, once you suspend a fund its marketability going forwards will be challenging and, particularly when combined with the publicity that this fund has had throughout its lifecycle, may undermine the long-term viability of the fund as a whole.”
*Read more about lessons from the Woodford crisis here.
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