The industry has given a lukewarm response to proposals by trade body the Investment Association to launch a new type of long-term fund.
The IA has confirmed plans to develop a “long-term asset fund”, which will aim to encourage long-term investment by limiting how often investors are able to withdraw their money.
The product, proposed in the IA’s “2025 Vision” policy document, has been seen as a response to the furore around the Woodford Equity Income fund. The products will be a way of addressing the so-called illiquidity mismatch between funds which can be bought and sold on a daily basis despite investing in assets which may take time to buy and sell.
Chris Cummings, chief executive of the Investment Association, says the development of such funds was in response to changing customer needs and would help to support the financing of companies and public projects.
There are, as yet, few details of how long-term asset funds would work in practice, but it is understood they could limit investors to withdrawing money on a monthly or quarterly basis, rather than being able to trade daily.
It is hoped that this will stop fund managers who are investing in illiquid assets such as property, infrastructure and unquoted companies from being forced into a fire-sale of their holdings in the event of a rush of investor redemptions. But the response from the industry has been largely lacklustre.
Rebecca O’Keeffe, head of investment at interactive investor, says the gating of the Woodford Equity Income funds and of a number of property funds after the EU Referendum in 2016 has “shone a very harsh light upon the question of liquidity in open-ended funds.”
She adds: “While we welcome what the IA is aiming to do in proposing a new structure that could be supportive of less liquid assets, we wonder what exactly is being offered that might entice investors to sacrifice liquidity when buying into these funds. Investors will reasonably ask: ‘what do I get in exchange for this lack of liquidity?’”
Closed-end funds are often cited as a more appropriate way to access illiquid investments. This is because they have a set number of shares in issue so even if the closed-end fund falls out of favour and investors rush to sell their holdings, while the share price might fall the manager will not be forced to sell his holdings.
O’Keeffe adds: “It would be reasonable to suggest that the industry already has all the structures available that it needs: open-ended funds for large liquid assets, investment trusts for mature assets that may be less liquid; VCTs that cater for the illiquid assets of new, start-up companies.”
The Limits of Trading Limits
Adrian Lowcock, head of personal investing at Willis Owen, points out that limiting the frequency that investors could trade a fund would not necessarily reduce the potential for a fund to have to gate: it could be that there is a flood of outflows at the designated trading period which overwhelms the manager.
He is also concerned that fund supermarkets may struggle to accommodate more complex trading arrangements and that investors, who are used to daily dealing and accessibility, would be reticent to limit their ability to trade. “This issue is that this would ultimately make investing hard and more complex for investors,” says Lowcock, “The reality is that we already have a solution in investment trust and this is an opportunity to highlight the benefit of these.”
Trade body the Association of Investment Companies has also voiced concerns that the creation of a new type of fund would not address the fundamental issues raised by the recent suspension of the Woodford Equity Income fund.
Ian Sayers, chief executive of the AIC, says: “The ability to sell your units or shares at a time of your choosing has been the linchpin of fund regulation for decades. This principle should not be abandoned without careful consideration of the implications for ordinary investors.”
He says that any fund management group choosing to use an open-ended fund to invest in illiquid assets rather than a closed-end structure should state why it believes this is in the best interests of consumers. He adds: “There are many commercial reasons why asset managers favour open-ended funds, even when it is clear that the closed-end structure is better suited to illiquid assets. We believe the time has come to put consumers’ interests first.”
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