Frozen by Fear: The Year That European Fund Investment Got Scary

(Bloomberg) -- The warning signs are piling up for investors in funds that sink their money into hard-to-sell securities. In recent months we’ve seen the demise of Neil Woodford’s business empire and a crisis at H2O Asset Management, triggered by their holdings of unlisted companies and unrated bonds. Now Woodford’s protege Mark Barnett has fallen into a similar trap, resulting in Morningstar Inc.’s downgrade of two funds he runs at Invesco Ltd.

All this drama has left unnerved investors wondering: who’s next? Here’s a timeline of the main events that brought us here:

June 3

Woodford, long one of Britain’s most celebrated money managers, stops redemptions from his flagship LF Woodford Equity Income Fund. The freeze is meant to buy him time to sell down the fund’s “unquoted and less liquid stocks” and meet the demands of clients who want their money back after a run of poor performance.

June 19

Morningstar suspends its rating of an H2O Asset Management fund, citing concerns about the “liquidity and appropriateness” of some corporate-bond holdings. H20 is a major holder of rarely traded bonds issued by companies linked to German financier Lars Windhorst. The fund also allows clients to make frequent withdrawals, creating the potential for a liquidity crunch.

June 24

Natixis SA goes into crisis-fighting mode to stem a wave of outflows from its H2O Asset Management unit, selling about 300 million euros ($332 million) of its unrated private bonds and marking down the balance to remove incentives for investors to pull even more.

June 26

Bank of England Governor Mark Carney reprimands investment funds that hold illiquid assets while allowing unlimited withdrawals. “These funds are built on a lie,” he tells Parliament, heaping pressure on Woodford and H2O.

July 1

H2O Asset Management halts an eight-day skid during which a group of six key funds plunged by more than 8 billion euros. The firm had taken steps to arrest the decline in assets by dropping entry fees for all of its funds, selling some unrated private bonds and proposing to create a so-called “deep value” fund for thinly traded assets.

July 11

Carney says Woodford’s decision to lock his main fund is “symptomatic of a broader problem.” The central bank says in a report that the mismatch created when funds offer daily redemptions while loading up on hard-to-sell assets could lead to runs, and this has the potential to become a financial-stability risk.

July 29

Woodford’s listed investment trust says it’s considering replacing him as portfolio manager, deepening his career crisis. On the same day, the administrator of his flagship fund says it may remain locked until December.

September 30

The U.K.’s Financial Conduct Authority stiffens its rules for funds that invest in hard-to-sell property assets in the first major rule change since the crises that struck Woodford and H2O.

October 15

Woodford runs out of road in his attempt to salvage his investment business. The administrator of his flagship fund ousts Woodford as manager and sends it into liquidation. Woodford objects, but before the day’s done he announces that he’s shutting his firm, Woodford Investment Management. The firm terminates its agreement to manage Woodford Patient Capital Trust.

November 6

Barnett, who followed Woodford’s lead in loading up on less liquid securities, is hit with rating downgrades on two of his funds at Invesco. Morningstar cites concerns about the way he’d changed the focus of his funds to buy smaller companies that are harder to sell.

--With assistance from Suzy Waite.

To contact the reporter on this story: Chris Bourke in London at cbourke4@bloomberg.net

To contact the editors responsible for this story: Shelley Robinson at ssmith118@bloomberg.net, Patrick Henry

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