In this series, we bust the jargon and explain a popular investing term or theme. Here it’s fund gatings.
What does this mean?
An investment fund may be gated, suspended or ‘shuttered’ if there is a stampede of withdrawals.
The closure should be temporary, but it can last for months, or even years.
The decision to gate is usually taken because the value of the fund’s holdings has fallen sharply, and these stakes would have to be sold at a substantial loss to meet redemptions. The holdings may be illiquid – as tends to be the case with commercial properties. In a depressed market, it is hard to find an immediate buyer for an office block, even at a knockdown price.
This is why a number of such property funds were gated in the wake of last September’s mini-Budget. This was not a first-time thing, as some were also gated in the aftermath of the Brexit vote in 2016 – and when the pandemic hit in 2020.
Downward spiral: An investment fund may be gated, suspended or ‘shuttered’ if there is a stampede of withdrawals
Any other reasons for a gating?
A gating may also be ordered if the fund manager is at the centre of a controversy.
Five Odey Asset Management funds are gated in response to a wave of redemptions spurred by the news that the group is under investigation in the wake of sexual misconduct allegations against its founder Crispin Odey. These funds may be transferred to another manager.
Any other high-profile gatings?
THE most notorious example is the shuttering of the flagship Woodford Equity Income Fund in the summer of 2019. The fund remains closed. Neil Woodford, its now-disgraced manager, had run the fund recklessly, backing small, unlisted companies, causing a slump in its value. The watchdog Financial Conduct Authority (FCA) has recently negotiated a redress scheme under which investors trapped in the fund could receive 77p in the pound of their losses, although this is less generous than it sounds. The Woodford scandal has soured many people’s perception of the entire fund management sector.
Can any type of fund be gated?
This is where it gets complicated. Only ‘open-ended’ funds, such as unit trusts, will be gated because the managers may find themselves forced to raise a lot of money fast through sell-offs to meet a tide of redemptions and may not wish to stage such a fire-sale.
By contrast, investment trusts are ‘closed-ended’. Since they are companies quoted on the stock market, they cannot be gated. If you want to exit from a troubled trust, you simply dispose of your shares – although you may lose a lot of money in the process.
Exchange traded funds (ETFs) are also quoted on stock exchanges which should mean that they should be liquid and so need not be gated if problems arise.
Any action planned on this?
The Woodford scandal caused wider questions to be asked about the liquidity of funds. Mark Carney, who was then governor of the Bank of England, contended that open-ended funds which owned illiquid assets like property were ‘based on a lie’ as investors were led to believe that they could access their cash whenever they wished.
The FCA is conducting a review of the £11 trillion asset management industry – the custodians of our pensions and savings – which will focus on the liquidity issue.
