Real estate, alternative real assets and other diversions

Blain’s Morning Porridge

The Macro View

“Every unresolved problem eventually creates something worse to solve it…”

In the headlines this morning…

I switched on the TV this morning and watched Naga sitting on the Brek-drek couch in Normandy, then a cut-away to a Piper at the moment British Troops landed on Sword Beach. He was playing Highland Laddie, the same tune I wrote about on Monday, when D-Day piper Bill Millan played it as he and his commandos stormed up the beach. Marvellous stuff.

Unfortunately, despite the BBC being in France, it did not provide any insights as to why the Fiat Chrysler / Renault merger collapsed last night. President Macron was just along the road, so it’s a shame Naga hadn’t walked over to ask why? We know the French govt and union board members voted against it… but they are only 2 of 9 board members. Personally, I didn’t understand the merger anyway… who drives a French car? Quel Fromage as the French never say….

Elsewhere a credit downgrade while Trump escalates the Mexican standoff! The ECB meets and has to work out how to bail out the Italian banks with more TLTROs while chastising Italy for borrowing too much, and we are wondering what next..

Back in Blighty..

It’s a tad cruel, but a few months ago I was at a meeting at the University Investment Management advisory group, and we were reviewing post-grad research proposals. One of them was a semi-serious proposal to analyse Neil Woodford’s performance a fund manager; the aim would be to rate Woodford buy investments as reliable sell signals. Oh… how we giggled…

Woodford’s tumble from grace may prove to be a systemic moment for the fund management industry. Other funds, set up to mimic Woodford, have also gated themselves. I would not like to be Hargreaves Lansdown or St James when customers start to question fee arrangements and their roles directing them into Woodford funds. The Investment Association is concerned about the reputational damage Woodford’s done to the retail investment sector. (No Sh*t Award on its way…) The FCA wants to know if Woodford broke rules capping investments in unlisted assets… Maybe not, but he clearly arbed them.

It’s worth remembering it was the gating of ABS funds that presaged the last big crisis… just saying…

The crisis at Woodford was one of liquidity – the pace of withdrawals exceeded his ability to liquidate assets. Much the same thing happened to GAM last year when investor withdrawals following the dismissal of a fund manager effectively crushed its’ liquidity and removed GAM as a player. 

Both Gam and Woodford effectively made the same mistake: dressing up wholly illiquid assets as liquid ones, and that investments theoretically compliant with Ucits are liquid. Both of them were caught. Woodford had the extra issue that his investments were just plain bad. The liquidity illusion is a particularly dangerous one – listing a stock in Guernsey, or a bond on an obscure Danish exchange does not make it liquid. But it might be enough to get the investor buying it to tick the box saying Ucits compliant.

There are no liquidity guarantees – assets becomes impossible to sell under 2 scenarios: i) a general market shutdown, or ii) a whiff of scandal around the holder’s name.. For the last few months folk have been waiting for Woodford to crash… It became inevitable.

There is serious regulatory danger here – regulators are going to sniff around the Woodford wreckage and conclude current rules on investing in “illiquid” assets need to be tightened. They will congratulate themselves mightily when new rules effectively ban investments in anything except FTSE 100 stocks and bonds that can prove they are actively traded. They will hi-five themselves on a job-well-dome making investment safer.






The Macro View, zLead Article, zNewsletter

About Bill Blain

Bill Blain

Bill Blain is Strategist for Shard Capital, a leading investment firm. Bill is a well known broadcaster and commentator, with over 30-years experience working for leading investment banks and brokerages at senior levels. He's been closely involved in the growth and development of the global fixed income markets, and pioneered complex financial products including capital, asset-backed securities and private placements. Increasingly, he's involved in the Real and Alternative Assets sector seeking to explain their complexity, how to generate decorrelated returns, and create liquidity in non-listed assets. Bill is a passionate sailor, talentless painter, plays guitar badly, is learning the bagpipes, and built a train-set in his attic.

Articles by Bill Blain

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