The Investment Association’s proposal to introduce a type of open-ended fund that aims to address liquidity crunches by only allowing investors access to their money at certain points has been met with a lukewarm response from the industry as some fail to see what it will offer that closed-ended vehicles do not.
The trade body has pitched Long-Term Asset Funds, an open-ended fund structure which will invest in illiquid real assets such as property and infrastructure, as well as private equity and private debt, but only allow investors to redeem at “appropriate time intervals” rather than on a daily basis.
It said this will encourage a longer-term investment horizon, channel much-needed investment into infrastructure projects and avoid situations where funds have been forced to gate, such as the recent Woodford Equity Income fund and several property funds after the Brexit vote.
The structure would co-exist with alternative forms of funds, notably closed-ended funds, the IA added.
Adds nothing new
Interactive Investor said while the consultation is in the early stages, the proposed structure does not appear to improve upon structures already available, in particular closed-ended investment trusts that do not need to respond to demands for redemption.
At Portfolio Adviser’s Northern Congress event earlier this month, almost half of fund selectors (48%) said they are interested in illiquid assets, but 9% said their clients would not allow it. It was unclear the exact reasons for this but when asked which type of vehicle they preferred for illiquids, 75% said closed-ended funds.
II head of investment Rebecca O’Keeffe (pictured) said: “It would be reasonable to suggest that the industry already has all the structures available to it that it needs: open-ended funds for large, liquid assets; investment trusts for either mature assets that may be less liquid or large liquid assets; VCTs that cater for the illiquid assets of new, start-up companies, which offer a hefty tax rebate to compensate for the risks investors are taking, in particular the lack of liquidity during the initial tax-related lock-in period; hedge funds for complex illiquid trading strategies.”
Will not resolve systemic problems
The Association of Investment Companies (AIC) said the proposals do not address the fundamental issues raised by the recent suspension of Woodford Equity Income Fund.
AIC chief executive Ian Sayers said: “This approach will not resolve the systemic problems that Mark Carney recently identified where he raised the prospect of funds which invest in illiquid assets experiencing the equivalent of a run on the banks. It is a pity that these threats to consumers and financial stability were not explored at yesterday’s Select Committee hearing with Andrew Bailey.”
The AIC has recommended that an asset manager planning to offer an open-ended fund investing in illiquid assets should publish its view on why the structure chosen is in the best interest of consumers.
The gating of Woodford’s £3.7bn equity income fund has shone a spotlight on the need for an alternative structure to the daily dealing fund which has become the norm.
SCM Direct co-founder Gina Miller has called on the FCA to ban illiquid securities from daily dealing funds outright while others have suggested harder-to-trade assets would be more appropriate in weekly or monthly traded funds.
The IA said it is publishing more detail on the proposals later this year.
