personal finance

Fund industry floats new structure for illiquid assets


The UK’s fund trade body has proposed a new kind of fund structure for investing in illiquid assets after problems at some open-ended funds with money in property and unquoted stocks.

The Investment Association on Wednesday outlined plans for a long-term asset fund, which would “offer a new way to gain sustainable returns from investments in areas such as private companies and infrastructure.”

Its recommendations follow the meltdown of Neil Woodford’s Woodford Equity Income fund in June, which had investments in illiquid stocks, and came as Mark Carney, Bank of England governor, warned that open-ended funds that invest in illiquid assets were “built on a lie” due to their liquidity mismatch.

In its latest policy paper, the IA said a long-term asset fund would be able to invest in less liquid or illiquid assets “such as property and infrastructure projects” and said such a fund would “incorporate high standards of consumer protection.”

Unlike most funds, however, the new structure could block investors from drawing their money out daily.

The IA said investors benefited from access to private markets, particularly in light of a falling number of listed companies in the UK, but said questions should be asked “about the role of daily liquidity and the extent to which it may be necessary and/or appropriate, depending on different asset classes and customer preferences.

“Our view is that there is a clear and important role for daily priced, daily traded funds, providing customers with access to a wide range of investment strategies and asset classes. At the same time, some asset classes do not lend themselves to daily liquidity,” the report said.

UK property funds were plunged into crisis in the wake of the Brexit vote, when funds holding £15bn of investors’ money were forced to halt trading after sliding property values and a wave of redemption requests.

The IA will publish a blueprint on the fund next year. Critics said customers would need educating about what to expect from the new kind of fund and some would struggle to adjust to a lack of access.

Ryan Hughes, head of active portfolios at AJ Bell, said: “If there is one thing the industry can learn from the suspension of the Woodford Equity Income fund it is that there is a mismatch between the daily liquidity funds currently offer customers and the actual liquidity in the underlying assets.”

But he said “resetting customer expectations” could be a “challenge”.

Rebecca O’Keeffe, head of investment at Interactive Investor, said she wondered what customers would be offered as a trade-off for the lack of liquidity. “What exactly is being offered that might entice eligible investors to sacrifice liquidity when buying into these funds?” she said.

“Given that the proposed long-term asset funds are able to limit withdrawals to brief windows that open every month/quarter, investors will reasonably ask ‘what do I get in exchange for this lack of liquidity?’,” she added.

Others have pointed out that investors are already able to access illiquid assets in investment trusts, which constantly trade and come with similar price tags. Investment trusts issue a set number of shares which trade in the secondary market, meaning funds are not forced to trade their underlying portfolios to meet investor demand.

The Association of Investment Companies, which represents investment trusts, is recommending that asset managers planning to offer open-ended funds investing in illiquid assets should publish their view on why the structure chosen is in the best interest of consumers.

“This would include consideration of the type of investor, the nature of the underlying assets, the redemption policy, the likely levels of cash holdings and the possible impact of these arrangements on investment performance,” said Ian Sayers, AIC chief executive.

“There are many commercial reasons why asset managers favour open-ended funds over closed-ended funds, even when it is clear that the closed-ended structure is better suited to illiquid assets. We believe the time has come to put consumers’ interests first,” he said.



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