Concerns that investors will follow "star" fund manager Neil Woodford out the door at Invesco Perpetual pose an acute dilemma, not only to holders of his funds but also to investors in the numerous smaller companies his funds invest in.
With £33bn under management, more than any other British fund manager, Mr Woodford, who last week stunned the industry by announcing his impending departure after 25 years at the Henley-based house, holds substantial positions in dozens of smaller listed and private companies.
Data provided by Morningstar show some of the combined holdings of the Invesco Perpetual High Income and Income funds at the end of January. Although there could have been changes since that time, Mr Woodford is known as a long-term investor and stock turnover within his funds is generally low. Data from statements to the stock exchange since January, showing holdings in these same companies across all Invesco Perpetual funds, are also presented.
Invesco Perpetual emerges as the largest or second-largest shareholder in 22 of the 25 companies examined. It owns almost half of e-Therapeutics, the Aim-listed drug company, and Imperial Innovations, the technology incubator spinout from Imperial College. It also owns more than 40 per cent of Halosource, the US-based water purification company, and Vernalis, the UK biotech business.
Other small, potentially illiquid companies in which it has a stake of 20 per cent or more include Breedon Aggregates, the cement-quarrying business, Helphire, the accident assistance group, and Retroscreen Virology, a healthcare spinout from Queen Mary, University of London.
Prasaanna Jeyanandhan, an analyst at Berenberg Bank, says there could be forced selling of some of Mr Woodford's positions, as nervousness among investors is likely to lead to outflows.
Mark Dampier, head of fund research at Hargreaves Lansdown, the investment broker, says a "huge amount of money" is likely to follow Mr Woodford, who plans to set up a fund management business.
However, Nick Mustoe, chief investment officer at Invesco Perpetual, says the company has already conducted analysis and scenario testing of the Woodford portfolios and their ability to meet possible outflows.
"We are very confident that the portfolios are highly liquid with a large proportion of large-cap stocks. There is a small proportion of the funds invested in unquoted stocks [around 4 per cent of the assets], a number of which are likely to reach IPO [a stock market listing] in the next couple of years. We are in no rush to attempt to realise these holdings as we believe it is in clients' best interest that we seek the best possible returns," said Mr Mustoe.
With 65 per cent of Mr Woodford's two flagship funds held in companies with a market value of £10bn or more, Brian Dennehy, managing director of Fundexpert, a research provider, believes the risk is "extremely small" that Invesco Perpetual would have to become a forced seller of some of its holdings to meet redemption requests.
However, although selling pressure could be met by disposing of more liquid stocks first, this would raise questions about the mix of the remaining holdings and the integrity of the overall portfolio.
Alan Miller, chief investment officer of SCM Private, the investment boutique, says Mr Woodford's departure raises significant issues, "in particular, whether the real liquidity in very large funds or less liquid investments matches the daily pricing mechanism within UK mutual funds, [as well as] the extent [to which] people redeeming from a fund can often gain at the expense of those who remain".
Some in the industry have warned that up to three-quarters of the investors in Mr Woodford's funds could ask for their money back.
The departure in March of Richard Buxton, a star manager at Schroders, was followed by outflows of more than £1bn. Assets in the Schroders UK Alpha Plus fund, managed by Mr Buxton, dropped by more than a third from the end of March, to £1.3bn by the end of September, according to Lipper, the data provider.
Institutional investors routinely review their holdings after the departure of a lead fund manager. Consultants also review their recommendations and changes can have a significant impact. Assets of the Axa Framlington Global Opportunities fund dropped by two-thirds in just two months after a Mercer downgrade following the departure of Anu Narula, the fund's co-manager.
Stephen Miles, head of Europe, Middle East and Asia manager research at Towers Watson, the consultancy, says it is vital to analyse what has been driving the performance of a fund.
"Understanding what has produced good results requires digging. Alpha [market-beating returns] could be the result of a systematic process as with quant funds, or [it could be] down to a team where co-portfolio managers are working alongside analysts rather than just the work of a single individual."
But Mr Miles adds that avoiding keyman risk is "not easy" in the asset management industry.
Ian Trevers, head of distribution at Invesco Perpetual, says the company has been talking to all of its institutional clients and their retained consultants in recent days.
"Our focus has been on talking about Mark Barnett [Mr Woodford's successor] and the characteristics of his investment style and current portfolio".
Mr Trevers says that Invesco Perpetual has seen a "measured response" from sophisticated investors and that more detailed meetings with clients will follow over the next few months.
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