Fund liquidity
The authorised corporate director’s responsibilities are not restricted to overseeing the investment manager.
The difficulties around the Woodford Equity Income fund have also highlighted the importance of fund liquidity – how quickly stocks held can be sold at a price reflecting their value, or, to put it another way, how fast the portfolio can be converted into cash.
The director is the independent steward of the fund and thus has responsibility for the monitoring and management of liquidity.
When commentators focus on fund liquidity they will often only refer to market data such as average trading volumes and ‘time to sell’ forecasts.
The director will study these figures, but they are likely to only form part of a more sophisticated liquidity analysis.
Liquidity monitoring and management should, in our view, be a comprehensive and ongoing process. This may begin with examining portfolio diversification, including the average size and maximum size of individual holdings.
The director is likely to study how much of a fund is held by each individual investor and the effect on liquidity if major holders took their money out.
They would also look at the companies that are involved in, or influence, the distribution of a fund – including advice companies, discretionary managers and fund ratings agencies – to assess the liquidity implications if they change their view on the fund.
In addition, they are likely to analyse historic data about fund flows and stress test the fund to calculate liquidity in different market conditions.
Marketing of the fund
In terms of how the fund is promoted, the director must ensure that the fund is being marketed correctly and to its intended audience.
They may review marketing documents, including factsheets, for regulatory compliance and appropriateness for the intended audience.
The director will also arrange for the production of all documents required by the regulator, including the prospectus, key investor information document, supplementary information document and application forms.
Wide-ranging responsibilities
They will carry out due diligence, on an ongoing basis, on all providers of services to the fund, including the fund sponsor.
The authorised corporate director’s role includes monitoring fund performance and the trading activities of the investment manager.
The director is also responsible for fund administration, overseeing the fund administrator where this function is outsourced. This includes checking the fund’s net asset value is being calculated accurately and passed correctly to data providers.
It is also the director’s role to ensure that all the necessary legal agreements and documentation are in place and up to date.
The director has the responsibility for agreements with investment platforms and they have strict capital adequacy requirements, in some cases backing themselves further with public indemnity insurance cover, so that they have the strength and stability to match their levels of responsibility.
