Carney Says Woodford's Fund Freeze Is Symptom of Larger Problem

(Bloomberg) -- Bank of England Governor Mark Carney said star stock picker Neil Woodford’s decision to freeze his flagship fund highlights the risks of money managers piling up hard-to-sell assets.

Woodford stunned the financial world last month when he locked the LF Woodford Equity Income Fund as he struggled to meet redemption requests following a run of poor performance. The suspension was intended to give him time to raise cash by offloading stakes in unlisted and smaller companies that he had built up in recent years.

While Woodford’s move wasn’t “systemic in nature,” it highlighted the issue of funds offering daily redemptions to clients while holding assets that they can’t quickly sell, according to the BOE’s latest Financial Stability Report published on Thursday. U.K. regulators are examining such liquidity mismatches and the effectiveness of the tools funds already use to deal with them, including suspensions.

“It’s symptomatic of a broader problem,” Carney told reporters in London. “Our sense is that the financial-stability risks are increasing.”

The risk is that funds offering daily redemptions, while investing in assets that can take weeks or months to sell, could “create incentives for investors to rush to redeem when they expect others to do so,” the BOE said in the report. “This has the potential to become a systemic issue.”

Read more: Woodford Loses Second Long-Time Ally as Fund Freeze Bites

Open-ended funds that offer short-term redemptions while investing in longer-dated and potentially illiquid assets such as corporate bonds currently have more than $30 trillion of global assets, according to the BOE.

The issue came to the fore when Woodford froze his fund, followed quickly by a run on funds at Natixis SA-backed H2O Asset Management, which had built up large holdings of unrated corporate bonds linked to a single German financier. About 8 billion euros ($9 billion) was yanked from the funds while H2O raced to stop the bleeding by dropping entry fees and selling some of the bonds.

The BOE also highlighted the risks of mutual funds building up large holdings of leveraged loans. Such holdings are now far higher than before the financial crisis.

“In a stress, the leveraged loan and high-yield corporate bond markets may not be sufficiently liquid to meet demand from borrowers, potentially restricting corporates from accessing funds,” the BOE said.

To contact the reporters on this story: Lucca de Paoli in London at gdepaoli1@bloomberg.net;Suzy Waite in London at swaite8@bloomberg.net;Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, ;Shelley Robinson at ssmith118@bloomberg.net, Patrick Henry, Marion Dakers

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