The sniff test – a fund industry problem? Or something bigger?

Fri 08 Mar 2019

By Brian Dennehy

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Asset managers Jupiter have been the subject of short selling in some scale - bets by big players that their share price will keep falling. Personally, I see no problem with Jupiter which justifies such action, and they are a firm with a well-deserved good reputation.  
 
This week and last the FT seemed to be struggling to find any consistent view on the reason for the short-selling.  Perhaps it is nothing more than some judging that a quoted fund manager is a geared bet on the stock market falling sharply.
 
Difficulties with two other funds are more of a concern. But first news this week on another bitcoin mystery/fraud.  Gerald Cotton, the owner of cryptocurrency exchange QuadrigaCX, mysteriously died in the Indian city of Jaipur in December.  Now £105 million of investors’ money has disappeared from the supposedly secure “digital wallets” held on his computer (see the BBC story for more on this). Will that money ever be seen again…?
 
Returning to much more mundane difficulties with two other more mainstream funds, I don’t propose going on about Woodford Equity Income, but the detail which has emerged in recent weeks just doesn’t feel right. The fact of the fund being very different from that which was bought at launch is not new news - but it was updated here in the Sunday Times, and our tables showing the top 20 holdings both at launch and now are shown at the end of that piece.
 
Then this appeared in Investment Week - I provide the link without further comment.
 
Separately, on Monday this week news emerged about City Financial, a company with a fund, City Financial Absolute Equity, that often features in our What’s Hot What’s Not feature for its unusual gyrations (certainly unusual for what should be a widows and orphans sector). This was posted in our Private Members Facebook Group on Monday, and then news emerged on Thursday that the City Financial Absolute Equity fund dealing was suspended.
 
This all follows on from the GAM “absolute return” funds (again, funds for widows and orphans?) being suspended and then closed last Summer. The management discovered that many bonds are illiquid – you can’t sell them. You don’t say! We have been going on about this for years – the liquidity problem which one day will blow up in scale, and the consequences of which will not be restricted to bonds and bond funds, as investors will scramble to sell anything for which they can get a price.
 
For sure these are all very different issues. But taken together, if you sniff air, you sense something is wrong. Some of these instances highlight problems with the fund industry, and also with its regulation. Yet for an old hand in the industry (like me!) these are the sorts of wrinkles you expect to see as entrenched bull markets get tired and roll over. 
 
When the bull market tide goes out, it will be increasingly obvious that not everyone had trunks on.
 
FURTHER READING
 

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