The Woodford scandal has prompted a discussion on liquidity and affected the way money managers communicate with clients. RFPs are now focused on liquidity which is the top priority to investors. Asset managers must provide detailed information on what is liquid within their portfolios and how liquidity is delivered.
- Asset managers are required to change the way they communicate with clients to address liquidity concerns.
- It is now more important than ever to have honest and transparent conversations with clients about liquidity of different asset classes.
- Structuring less liquid products to ensure a continued flow of capital from investors poses a challenge to asset managers and the regulator.
- Regulation is expected to become more rigorous to prevent liquidity mismatching.
The roundtable discussion opened with participants agreeing that the scandal has changed the way asset managers communicate with clients. Elaborating on that point, participants noted that RFPs are now focused on liquidity with asset managers having to provide detailed information on liquidity dealing and pricing of different asset classes and how these would behave in times of market stress.
The discussion moved on to participants commenting on how investors need to balance their need for liquidity and the returns / yield they seek. Liquidity is now a point of concern even to investors who do not require daily liquidity like institutional investors or high net worth individuals. Participants agreed that the scandal caused an industry wide panic.
To tackle this challenge, participants stressed the need for honest and transparent conversations with clients about the liquidity of different asset classes. It is important for asset managers to explain to their clients that if you are invested in e.g. real assets, 90% of the time the asset class will deliver what it’s meant to, but that certain risks persist due to the illiquid nature of the asset class.
Participants then discussed the structure of different asset classes and whether long-term vehicles for a fixed term could be a possible solution. ETFs were also debated, and participants agreed that broadly speaking ETFs offer good liquidity – however an economic downturn followed by mass fund outflows could still present a challenge.
The conversation moved on to a debate on concerns around how platforms and internal systems would cope with any proposed new long-term structures. Platforms have no preference for weekly (never mind monthly or quarterly) trading and are also more geared to UK registered funds. Participants also highlighted that platforms should accommodate illiquid assets.
The session ended with a debate on the future of regulation (and what the regulator should have implemented before Woodford) which will be focused on more rigour around daily dealing and liquidity mismatching. Some agreed this will also lead to a greater scrutiny of smaller asset managers who are already under a lot of pressure to meet regulatory requirements.
- Communication with clients should be more open and transparent to address their liquidity concerns.
- Regulation needed to ensure clients investments are protected.
- Structures are needed to prevent liquidity mismatching that can be distributed widely through platforms.