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Invesco Perpetual fined £18.6m over fund failings

(Update) Invesco fined for breaches that saw it compensate investors in its two big Income funds, previously run by Neil Woodford.

 
Invesco Perpetual fined £18.6m over fund failings

City regulator the Financial Conduct Authority (FCA) has fined fund group Invesco Perpetual £18.6 million for exposing investors to greater risks than they had been led to expect in 16 of its funds.

The FCA said that between May 2008 and November 2012, Invesco did not comply with investment limits designed to protect investors by limiting their exposure to risk. That led to £5.3 million of losses on three funds, including the huge Invesco Perpetual Income and High Income funds, formerly run by star fund manager Neil Woodford (pictured), who has since left the group to set up his own venture.

Also affected was Invesco Managed Income , a fund investing in Invesco funds run by the firm's chief investment officer Nick Mustoe. Invesco has compensated the funds for the losses incurred.

Invesco also did not clearly inform investors or explain the risks of its use of derivatives in the Income and High Income funds, the FCA said. Trades were also recorded late in its fixed income division, meaning funds could have been wrongly priced. However, Invesco said that issue did not lead to funds needing to be repriced.

A further failing of its fixed income business was over the way it monitored aggregated trades, where a number of funds buy or sell the shares or bonds of a single company at the same time. Invesco's manual process meant it could not properly tell if trades were allocated fairly between funds, according to the FCA.

Investment limits broken

A further 13 funds were affected by breaches of investment limits but did not incur losses and did not have to be reimbursed by Invesco. They were:

Most of the investment limit breaches relate to an FCA rule that dictates no more of 10% of a fund can be held in shares of one single company. But the fund's high conviction stakes of above 5% must not make up a combined 40% of the fund. The FCA said that one of the Invesco funds broke this rule on 25 November 2010, when the shares of one of the companies it owned jumped, causing it to breach the 5% threshold, and taking the aggregate high conviction holdings in the fund above 40%. The next day, the fund bought more of the shares, exacerbating the rule breach. The FCA said that over the four-year period, Invesco committed 22 trades that broke the rules in this way.

Eight trades breached FCA rules stating funds cannot control more than 20% of a company's shares carrying voting rights, while three trades broke a rule that funds cannot own more than 10% of non-voting shares in a single company.

Derivatives not disclosed

The derivatives failings, which relate solely to the Income and High Income funds, relate to a lack of disclosure. These funds were allowed to take positions of up to 20% of their assets in derivatives, but their simplified prospectuses carried no direct reference to this. Despite this, Invesco began introducing borrowing to the funds through derivatives from mid-2010, and by 2012 this accounted for around 5% of the funds, or £1 billion.

The FCA said Invesco acted quickly to improve its systems and controls and fix the problems it had identified.

‘Investors of all sizes trusted Invesco Perpetual to manage their money,’ said FCA director of enforcement and financial crime Tracey McDermott. ‘They signed up for a certain level of risk but we found Invesco Perpetual’s actions were at odds with investors’ reasonable expectations.’

Invesco Perpetual chief executive Mark Armour said he was confident the fund group’s systems were now ‘strong, effective and complaint with all applicable regulations’.

‘The small number of impacted funds were fully reimbursed. In this instance, we clearly fell short of the high standards we consistently strive to deliver. However, we are pleased that this matter has been fully resolved with the FCA and is now closed.’

13 comments so far. Why not have your say?

tony williams

Apr 28, 2014 at 12:08

nice try on. but lost confidence and trust with you city slickers

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John Coles

Apr 28, 2014 at 14:43

What on earth are you trying to say?

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glyn rees

Apr 28, 2014 at 16:32

Will the investors receive any compensation?

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Broomtree

Apr 28, 2014 at 18:13

Interesting timing with this.....on a day when the various funds get a nice bounce because of Woodford's large Pharma holdings but it does beg some serious questions about basic management procedures.....these guys manage a small fortune and they don't know that a holding is at or near its limit before buying more? Doing bulk purchase [which makes perfect sense] but then they are not sure of allocations to various funds? Holding risk that is not declared in the prospectus? Sloppy and careless me thinks...and paid a fortune for being so no doubt

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mike88

Apr 28, 2014 at 18:31

Let's hope the fines will not be added to the running costs of the funds in question.

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Anonymous 1 needed this 'off the record'

Apr 28, 2014 at 18:48

WHO WOULD WANT TO FOLLOW HIM NOW!?

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William Phillips

Apr 29, 2014 at 00:26

Using derivatives is an attempt by open-ended funds to simulate the potential benefit of gearing in investment trusts.

Yet another reason to prefer ITs, whose rules of operation are spelt out at great length in the annual report, approved by shareholders in general meeting and whose form and observance are part of the fiduciary responsibility of directors of what are quoted PLCs.

I do not recollect any IT taking liberties and being fined for the same reasons as Invesco. They are often called fuddy-duddy, but the upside is that they are much more effectively constrained by law.

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Roy TROTTER

Apr 29, 2014 at 11:45

As a novice, does this mean I should trust Neil Woodford less?

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Richard100

Apr 29, 2014 at 14:32

@mike88 If the fines are added to the costs of the funds it would be a travesty as the regulator has supposedly levied these fines to protect fundholders. The cynic in me believes the fines will be passed on to fundholders eventually anyway. How eklse will Investec get the money to pay them, salary cuts - ha ha ha.

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Richard100

Apr 29, 2014 at 14:34

@mike88 If the fines are added to the costs of the funds it would be a travesty as the regulator has supposedly levied these fines to protect fundholders. The cynic in me believes the fines will be passed on to fundholders eventually anyway. How else will Invesco get the money to pay them, salary cuts - ha ha ha.

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Graham S-Brown

Apr 29, 2014 at 15:52

CF Arch cru broke all these rules too so how come Capita get away with just a slap on the wrist despite losses of over £200m. It beggars belief.

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J1

May 22, 2014 at 16:32

Was Woodford asked to resign as a result of this wrong doing?

Wolf of Wall Street in Hendon ?

How were the values of the funds invested ?

Do investors have a case ofr compensation ? and if so should they approach the FSA ?

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John Coles

May 22, 2014 at 17:02

And are you, J1, an utter cretin?

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