The risks inherent in open-ended property funds have received a lot of media coverage of late – see my blog post of the 5th July which simply said they should be avoided. With many such funds closing so that investors could not take their money out, the risks inherent in providing liquidity to investors when the underlying assets (namely buildings) are highly illiquid have become apparent.
Paul Killik had an article published in Saturday’s FTMoney (16/7/2016) that made some highly intelligent comments on the general risks of bond funds. Unfortunately if private investors wish to invest in listed bonds, they have few choices. Not many bonds are listed on the ORB retail bond platform run by the LSE where they are available in sizes suitable for retail investors. Most listed sterling or EU bonds are only available in very large lot sizes which effectively excludes most private investors. In general private investors are encouraged to invest in bond funds because the terms on individual bonds may be complex. Mr Killik puts this down to the EU Prospectus Directive rules, encouraged by product manufacturers and bankers. He also argues that bonds are no more complex than equities and hence encouraging investors into bond funds makes no sense.
That is particularly so when one bears in mind that bonds are now at an all time high because of record low interest rates. Although bonds in general may be more liquid than direct property, if there is a rush for the exit then bond funds might not have the cash resources to meet redemptions. He says “my fear is that bond funds could be gated for many years given the likely absence of alternative buyers” in such circumstances.
Perhaps his concern is overdone, but certainly it might be preferable to consider only holding short-term bond funds at present as interest rates surely can’t go much lower. Funds holding short term bonds would also be quicker to wind down if need be.
Insider Trading
Gavin Breeze, a director of Proxama, has been fined £60,000 by the Financial Conduct Authority (FCA) for insider trading. He tried to sell his entire holding in MoPowered where he was a non-executive director after being told confidentially that it was about to launch a share placing and was offered shares at the discounted price. In reality he only managed to sell 10,000 of his 1.3 million shares after he told his broker to sell them all “at any price”. He will be compensating those who purchased the shares.
The Head of Enforcement at the FCA said “Mr Breeze’s misconduct demonstrates the abuse of insider trading is still not well understood or appreciated, even by experienced industry professionals”.
This is a complex area of law however and the new EU Market Abuse Regulation (MAR) has some impact – see this article by Slaughter & May on its impact: https://www.slaughterandmay.com/media/2535170/the-new-eu-market-abuse-regulation-an-overview-for-uk-issuers.pdf .
It is of course problematic when a company can undertake “market soundings” about possible placings (and the share price and volumes obtainable) and hence inside information becomes more widely known. That is why I have previously supported the idea that shares should be suspended immediately a placing is contemplated.
But there are simple rules about when directors in a company can trade shares which were obviously ignored in this case.
New Business Secretary
Greg Clark has been appointed Secretary of State for Business, Energy and Industrial Strategy, i.e. will head the BIS Department which has a major role in business regulation.
Mr Clark is M.P. for Tunbridge Wells, was Director of Policy for the Conservative Party from 2001 to 2005, and subsequently has had a number of ministerial positions. That includes Financial Secretary to the Treasury from 2012 to 2013 (i.e. about a year). Before politics he worked for Boston Consulting Group and as head of Commercial Policy at the BBC.
I cannot recall meeting Mr Clark, but I did write to him in early 2013 when he was at the Treasury on the subject of AIM market regulation. It explained the problems of the existing LSE “self-regulation” of the market and the Nomad system. If anyone would like a copy please let me know. I did receive a response from one of the Minister’s civil servants which was not particularly helpful. Well it’s now 3 years later and the problems of AIM still remain and we are still pursuing some reform.
But I wish Mr Clark well in his new position. There is a lot to do in his department.
Roger Lawson
