When a fund manager doesn’t invest money in line with the investment strategy published or the agreed investment mandate, there could be a claim. These are certainly less frequent than those involving administrative errors but can still result in an unhappy client.
The truth is, fund managers are usually very good at doing what they say they will do and following the investment prospectus. While we haven’t seen many of these claims, there have been occasions where rogue employees in fund management teams have taken it upon themselves to increase a fund’s portfolio allocation in a foreign exchange, and the volatility of the market has caused a short-term loss and drop in a fund’s value.
As with administrative mistakes, market volatility can compound a situation and work against fund managers.
Insurance for fund managers is harder to obtain now than it has been in recent years. Underwriters are all too willing to increase premiums as a result of a number of factors such as:
- Market volatility
- Economic instability
- Horror stories of claims, and the willingness of claims management companies to pursue fund managers
One of the examples often quoted is the fallout from the Woodford fund collapse.
Was this a case of funds not being invested in line with the investment prospectus? Perhaps not, but there are certainly allegations regarding the liquidity of the fund and its ultimate level of risk. Fund managers undoubtedly have their own opinions on the handling of the liquidation of the Woodford flagship fund but from an insurance perspective, there must have been claims (mainly against financial advisors, rather than fund managers). Woodford’s own insurers, whoever they may be, must have had to deal with a huge number of enquiries and claims. Presumably a total loss for the insurers in question and huge compensation paid to the administrators.
The power of the press and media on the value of investments and funds cannot be understated. In the Woodford fund case the ‘press effect’ which started with the withdrawal of Kent Council’s support caused a very quick domino effect ultimately resulting in its swift failure. We have seen the same with unregulated investments such as cryptocurrency. When the media and press blow in one direction the value of such investments can swing more than Jimmy Anderson’s red ball on an overcast morning at Trent Bridge.
The types of funds that suffered greatest losses from Woodford type claims are those that had invested heavily in property. Those property focussed funds have been hit particularly hard during covid, with commercial rents dropping. Such funds naturally have fewer liquid assets, which can create a ‘run’ when lots of investors wish to exit quickly.
To make matters worse, there is no shortage of vultures circling, rightly or wrongly. With lawyers and claims management companies advertising to previous Woodford investors and encouraging claims to be made against anyone in the investment chain, including advisors.
Although we continue to see failed funds, they are the exception; 99% of fund managers are very successful. The good news is that claims are avoidable, as long as fund managers follow the agreed investment strategy, learn lessons from past mistakes and of course – remain adequately insured.