Morningstar - Fall 2019 - 22

Dispatches

portfolio manager. At the new company, Greg
McGreevey has the job of overseeing all
of Invesco's group CIOs. Memani will leave the
firm at the end of March, serving in the meantime
as an advisor and reporting to McGreevey.
Memani has been removed from the funds he
had been comanaging, including Invesco
Oppenheimer Total Return Bond OPIGX, Invesco
Oppenheimer Global Strategic Income OPSIX,
and Invesco Oppenheimer Capital Income
OPPEX. In some cases, his comanager remains
on the fund with additional managers, in
other cases, not.
Most of these changes aren't surprising, for they
involve relatively small funds or those with
weak performance. Many of the bigger, and better,
funds and their managers were left alone.
Notably, Invesco took a hands-off approach to the
international funds from both the Invesco and
former Oppenheimer sides. That may be because
they are among the group's strongest processes,
teams, and performers.
But two international-fund portfolio managers
departed Oppenheimer before the acquisition
closed. In September 2018, Rezo Kanovich
left Invesco Oppenheimer International Small-Mid
Company OSMAX with two of his analysts for
Artisan. Then in March, Rajeev Bhaman retired,
leaving Invesco Oppenheimer Global OPPAX,
though Bhaman had announced his retirement
a year prior. In both cases, experienced
successors took the reins.
Meanwhile, Invesco's legacy international group
remains stable in Austin, Texas, but it runs
a much smaller pool of assets (though still tens
of billions of dollars). With the exception
of giving the U.S. sleeve of Invesco Global Small &
Mid Cap Growth AGAAX to Ryan Amerman,
the team's resident domestic-equity portfolio
manager, nothing has changed.
Through all the changes to investment teams and
assignments, Invesco says that there are
no modifications to any of the funds' investment
strategies; however, considering the overlap
here, it's reasonable to consider that some
of these offerings will eventually be merged. That
could ultimately eliminate some redundancies,

Morningstar Fall 2019

and importantly costs, which should bring down
expenses, benefiting those investors.
Of the 56 funds (including variable insurance
accounts and money market funds) that
have experienced some kind of manager change,
Morningstar covers 13 of them. In June,
three were Under Review: Invesco Oppenheimer
Capital Income OPPEX, Invesco Oppenheimer
Global Allocation QVGIX, and Invesco
Oppenheimer Senior Floating Rate OOSAX. The
other 10 haven't had their Analyst Ratings
changed as a result of these announcements.
Bridget Hughes, CFA, is director of parent research
for Morningstar.

Woodford Facing
Dramatic Liquidity
Challenge
GREATER EUR OPE

time to significantly increase the liquidity
profile of the portfolio without triggering a fire sale
of illiquid assets. However, with portfolio
positioning now focused more on sourcing liquidity
than on investment conviction, we considered
the strategy structurally impaired in its ability to
implement its investment process.
Morningstar has developed innovative new tools
that allow investors to more easily see if a
fund is running into liquidity issues. These use our
holdings database and Morningstar equity
data to drill deeper into funds' portfolios. These
tools can only assess listed holdings, and
therefore, they exclude the sizable unlisted portion
of this strategy-which is inevitably less liquid.
Even excluding those unlisted holdings, our
analysis reveals a portfolio liquidation profile for
LF Woodford Equity Income that is one of the
most dramatic that we've seen. In our worst-case
estimate, it would take around 100 days
to burndown, or sell, 20% of the fund's holdings.
Even if we use the latest 30-day liquidity,
we estimate it would likely take about a month
of trading to meet a 20% redemption.

United Kingdom

The trials and tribulations of Neil Woodford
and his eponymous investment boutique have
been well documented. In early 2018, we
downgraded the flagship LF Woodford Equity
Income to a Morningstar Analyst Rating of
Bronze from Silver; the catalyst for the downgrade
related to our concerns over the extent of
the fund's shift in market-cap profile, combined
with the nature of stock-picking problems.
At our next review in April, we downgraded the
strategy to Neutral, noting our concerns
that "persistent redemptions, underperformance,
and stock-specific issues, combined with
the manager's relentless willingness to push the
portfolio to its liquidity limit, have resulted in
portfolio positioning that we consider extreme."

Assessing available liquidity is incredibly difficult.
Liquidity is influenced by many factors and
often dries up when it is most needed. That's why
Morningstar uses historical lows for stresstesting liquidity. To derive the worst case, we start
with the lowest 30-day average daily trading
volume for each individual stock going back
to 2000. We then take 25% of that number, as we
don't believe that one fund would be the only
entity looking to sell at any one point (especially
in a liquidity event). It is also a rough proxy for
the portion of trading volume a fund could access
without alerting the market to its intentions.
We then take the number of shares a fund owns
in each of its holdings and divide it by our
new daily trading volume estimate to arrive at the
approximate number of days it would take to
fully liquidate that position.

On June 5, we further downgraded the fund to
our lowest rating of Negative, after the fund
suspended the ability of investors to transact in its
shares on June 3 after heightened levels of
redemptions. The action was taken to allow for

While it is highly unlikely that managers will
need to liquidate their entire portfolio, this liquidity
profile gives insight into where difficulties may
arise. In addition to our conservative scenario, we
calculated a liquidation profile based off

Morningstar - Fall 2019

Table of Contents for the Digital Edition of Morningstar - Fall 2019