There’s never just one cockroach. That market truism, noted more than a decade ago by market strategist Dennis Gartman, has been useful in divining the aftershocks of everything from the credit crunch to the European debt crisis to the Volkswagen AG emissions cheating scandal. So it shouldn’t be a surprise that it also seems to apply to fund manager Neil Woodford and his misadventures in stocking his portfolio with illiquid investments.

Shares in Natixis SA dropped to their lowest in three years after the Financial Times wrote that one of its investment funds, H2O asset management, had loaded up on hard-to-trade bonds of companies related to German entrepreneur Lars Windhorst. The article prompted Morningstar to suspend its rating on one of the funds managed by H2O, which oversaw almost $33 billion at the end of last year.

Shareholders of Natixis may have overreacted, given that the fund unit accounts for only about 6 percent of the French bank’s net income, according to Jefferies analyst Maxence Le Gouvello du Timat. But Morningstar isn’t likely to hang around in dropping any other funds it deems to be at risk of trapping investors due to liquidity mismatches, especially given that it’s taken GAM Holding AG a year to unwind its absolute return bond funds after freezing them. 

The revelations about the scale of Woodford’s escapades prior to his move earlier this month to freeze redemptions from his flagship fund suggest that investors can’t rely on the regulator to safeguard their interests.

In a letter published this week, the Financial Conduct Authority revealed that its “preliminary supervisory inquiries” suggest Woodford had about 20% of his Woodford Equity Income Fund in unlisted securities in February of this year. That’s astonishing.

The maximum allowed for the fund was 10%. So Woodford didn’t just edge over the limit, he blasted through it. For every 100 pounds ($127) invested, 20 pounds was in illiquid investments, double the amount that investors in his fund would have expected.

Moreover, the FCA said this was the third time the fund had exceeded its illiquidity limits, following breaches in February and March of last year that “were each notified to us as resolved within a timeframe we had agreed.” And yet, on all three occasions, investors were left in the dark.

“At no point would it have been appropriate for the FCA to notify any platform or investors of these breaches,” a spokesman for the regulator told the Telegraph earlier this week.

Really? I can just about see how last year’s transgressions could be forgiven if they were inadvertent and swiftly resolved. But having twice as much of the fund in unlisted investments in February strikes me as an entirely appropriate time for the regulator to force it to come clean with the investors it owed a duty of care to, even if the FCA itself didn’t type the email or sign the letter advising them of the infringement.

It’s still not clear how long the 3.8 billion pounds will remain frozen in Woodford’s fund, or indeed how much money investors will end up getting back. But now would be a good time for the trustees of every single fund they’re responsible for that offers daily withdrawals to ask some hard questions about just how easy it would be to buy and sell the securities in the portfolios if a flood of investors demanded their money back.

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To contact the editor responsible for this story: Jennifer Ryan at

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was the London bureau chief for Bloomberg News. He is also the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

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