Published today, the discussion paper titled Illiquid Assets and Open-Ended Investment Funds: DP17/1, is billed as a dialog about risks created when investors use open-ended funds to gain exposure to assets that may be difficult for the fund manager to buy, sell or value quickly.
The illiquid assets it singles out are property, land, infrastructure, and financial assets such as unlisted securities.
Several popular property funds have now lifted suspensions in trading that were implemented in the midst of the panic last summer in the build up to the Brexit vote, and its aftermath.
The paper questions the balance of interests between investors who want to withdraw their money and those who want to remain, and addresses the difficulties if investors expect to be able to withdraw their money at short notice
“For example, it can be difficult for a manager to calculate the price of a fund every day if that fund invests in illiquid assets whose prices are calculated less frequently than every day,” the regulator said.
“These difficulties can be exacerbated if an event in the market triggers an upsurge in redemption demand, or conditions change in the market for the underlying assets.
“This happened after the referendum vote on 23 June 2016 to leave the EU, when liquidity management issues arose in some UK open-ended property funds.
“So, if the market for the underlying assets is affected by sudden, severe changes in conditions, leading to price falls that are not fully reflected in fund valuations, some investors might be able to sell their holding for more than it is worth, disadvantaging the remaining investors in the fund.”
The discussion paper is open for feedback until 8 May 2017. The FCA will draw on the responses received, together with the further supervisory work it is currently undertaking, to decide whether or not it needs to propose any changes to Handbook rules and guidance.
