Research house Morningstar has highlighted potential sell-down driven liquidity concerns in its decision to place the Milford Trans-Tasman Fund ‘under review’.
The Morningstar downgrade – which essentially urges investors to hold off on further contributions rather than to redeem funds – was issued in the wake of the sudden exit of portfolio manager, Mark Warminger, from the Milford team.
Warminger’s departure was noted on the same day Milford was fined $1.5 million by the Financial Markets Authority (FMA) in relation to alleged market manipulation charges levelled at an anonymous ‘trader’.
Kathryn Young, Morningstar analyst and author of the Milford report, said during the course of the FMA investigation fund outflows have been “minimal”.
“But that could change [after the settlement],” Young said. If outflows picked up there was a risk of forced selling in some of the fund’s positions, she said.
“Some stocks [in the Trans-Tasman fund] are liquid, others are less so,” Young said.
The Morningstar report also flagged the transition of Warminger’s duties to Milford chair and founder, Brian Gaynor, as potentially disruptive.
“Our conviction in Gaynor is high… ,” Morningstar says. “It’s worth noting, however, that the style of this fund is different from the absolute return approach deployed in his flagship strategy.”
As well, the Morningstar report says “unorthodox portfolio construction” could unsettle the Trans-Tasman Fund.
Young said the ‘under review’ status, which applies only to the Trans-Tasman product, would be updated after formal meetings with Milford.
Meanwhile, the New Zealand Superannuation Fund (NZS), which suspended Milford’s $281 million local equities mandate in April would “consider the report in detail before deciding upon our response”, a spokesperson said.
“Milford’s mandate will remain suspended until further notice. We have the capacity to manage the funds in-house on an ongoing basis,” the NZS spokesperson said.
It is understood other institutional investors and consultants are reviewing their Milford exposure post the FMA settlement.
Milford is primarily a retail manager – including a large direct component and a $450 million KiwiSaver scheme – but has secured a number of mandates with charities, super funds and other wholesale investors. For example, multi-management firm Mercer uses Milford on its NZ equities platform while investment consultancy firm, Melville Jessup Weaver, has also recommended the manager to several of its clients.
Last Thursday, Milford agreed to pay a fine of $1.1 million and $400,000 in legal costs.
In a statement the FMA said “the trading conduct [uncovered in the Milford investigation] breached the market manipulation prohibitions in s11B of the Securities Markets Act 1988”.
“As Milford is the relevant trader’s employer, the FMA considers that Milford is liable for the trader’s alleged breaches of the Act,” the regulator’s statement says. “Milford denies that it is liable for any alleged breaches. The FMA acknowledges that its conclusions have not been tested in court.”
While Milford managing director, Anthony Quirk, described the “full and final” settlement as a “commercial” solution, the FMA will continue its probe into the unnamed ‘trader’ at the centre of the market manipulation allegations.
However, Milford did cop the blame for poor governance procedures, which it has since amended after hiring PwC to review its operations.
“Milford and its board accept responsibility for the inadequate oversight and control of the trading conduct which was under investigation, and the failure to identify and monitor this activity, or to assess whether the activity was appropriate,” the FMA statement says.