Woodford fund lockdown forces Bank to close in on investment funds
The Bank of England is conducting a review on investment funds after a series of red flags in a number of markets including property, debt and equity.
Such funds are good finance sources for the real economy but have become an increasing risk with money often going into assets that are difficult to sell on quickly despite investors having instant cash access.
The Bank’s Financial Policy Committee is concerned following the Woodford equity income fund being locked down this year.
The lockout came after investors sold off commercial property in the aftermath of the 2016 EU referendum and then dispensed with the bonds of indebted business in 2018.
The Bank’s concern is that such impacts could have a knock-on effect to the economy.
The Financial Policy Committee said in its meeting that: “Large-scale redemptions from funds could test markets’ ability to absorb asset sales, amplifying price movements, transmitting stress to other parts of the financial system and disrupting the availability of finance in the real economy.
“The mismatch between redemption terms and the liquidity of some funds’ assets has the potential to become a systemic issue”.
The Bank is now seeking to alter how investors access their funds, aligning redemption with the liquidity of the funds’ assets.
This would see investors in commercial property having to wait several months before being able to withdraw their cash, given the length of time it can take to sell off assets.
The measure would stop investors bugging out in the case of red flags in any fund or market which would prevent the fastest sellers escaping early and leaving the other investors with the hardest assets to shift.
The Bank has also said that there is an increased perceived likelihood of a no-deal Brexit, which will do little good to confidence among foreign investors, a group whom a lot of markets rely on.
Foreign investment into commercial property and foreign lending to companies in debt is down in 2019 by around 80 per cent which may have repercussions on financial conditions and, therefore, the economy as a whole.
Increased Chinese debt amid the trade war with the United States has exacerbated the issue, forming a two-pronged threat along with the complications associated with a possible no-deal Brexit.
Tariffs on US-China trade are currently as high as 25 per cent.
The Bank of England is confident, however that the UK banking system is ready for a no-deal Brexit and will continue to lend, even if a trade war impacts the economy simultaneously.
However, the Financial Policy Committee warned that financial stability does not equate to market stability, with volatility in the markets and changes in asset prices expected should a disorderly Brexit come about.