Two of the largest platforms have hit back at accusations from Terry Smith that fund supermarkets promote an unnecessary culture of daily dealing, insisting they do offer funds with longer selling periods.
Speaking to the Financial Times, Smith, manager of the £18bn Fundsmith Equity fund, accused platforms of forcing funds that hold hard-to-sell assets to offer daily liquidity.
He said despite it not being mandatory for Ucits funds to be daily dealing, platforms had turned the Ucits structure into the accepted practice by refusing to sell funds with less frequent redemption terms.
“There is nothing wrong per se with open-ended funds owning [hard-to-sell] companies,” Smith told the FT. “What is clearly wrong is putting such instruments in a daily dealing fund. But at the moment you can’t list a fund on a platform in the UK unless it’s a daily dealing fund.”
Smith’s comments follow a series of high-profile liquidity issues with daily-dealing funds, including the freezing and subsequent blow-up of the Woodford Equity Income fund, which led to the eventual closure of Woodford Investment Management, the gating of the £2.5bn M&G Property Portfolio and issues at six bond funds run by Natixis subsidiary H2O Asset Management.
Smith warned that platforms’ refusal to sell funds with monthly or quarterly redemption terms could see managers of less liquid strategies “in the same position of banks faced with a run”.
AJ Bell and Interactive Investor do not insist on daily dealing
But AJ Bell and Interactive Investor said they did not insist on daily dealing, adding they simply reflect the trading frequency determined by the fund which in most cases is daily.
An AJ Bell spokesperson said: “We don’t insist on daily trading – we simply reflect the trading frequency the fund chooses and we do have funds on the platform that are not daily traded. The most high-profile examples are the Ruffer funds which are weekly traded.
“The proportion of non-daily traded funds is very small but this is not because of anything we insist on, it has just become the norm for retail funds to offer daily trading. This is something we have questioned publicly, particularly in relation to property funds where we believe there is a liquidity mismatch between the assets they hold and daily trading.”
An Interactive Investor spokesperson said fewer than 20 of the more than 3,000 funds on its platform are not priced daily. But it added this is due to the volume of funds available, where there is customer demand, that are not priced daily rather than its own restrictions.
All the funds on its Super 60 list are daily dealing, however.
The spokesperson said: “Operationally we can support whatever valuation point the fund manager chooses to offer and do not restrict access purely where daily valuations are not possible.
“Interactive Investor will offer whatever the fund managers and investors want to get access to as long as it is operationally and regulatory possible and subject to our governance. In the vast majority of cases daily pricing works fine and so we will support the best solution for investors and fund managers alike.”
AJ Bell said even if a fund moved to monthly or three-monthly trading it would not be a problem. “The bigger challenge would be to educate investors about longer trading times, why they are sensible and what it means for their investments,” the spokesperson added.
II backs closed-ended vehicles for illiquid assets
Interactive Investor said it is “instrument agnostic” as a business but the closed-ended structure is better suited to investing in illiquid assets.
“That’s why, when it comes to property, we only have property investment trusts on our Super 60 rated list,” the spokesperson added. “Our customers clearly agree – when it comes to property collective investments, investment trusts account for 90% of assets held on our platform, with investors preferring investment trusts, and this is not a new trend that happened following the suspension of the M&G Property Portfolio.
“There’s nothing wrong with funds with weekly as opposed to daily dealing, but when it comes to illiquid assets, investors have the benefit, via the investment trust structure, of having instant access without compromising liquidity.”
This is not the first time Smith has had a run in with platforms. In October 2018 Portfolio Adviser reported Hargreaves Lansdown had come out fighting against critics who said its rationale for shunning Fundsmith Equity from its then Wealth 150 list didn’t stack up.
