The Association of Investment Companies has called on the EU to make investment companies a key part of plans to create a more balanced funds market.
The AIC has highlighted key reasons why investment companies could be invaluable in raising funds for long-term investment.
The trade body stated investment companies are suited to investment in small and medium-sized enterprises and infrastructure as they do not have to sell assets to meet redemptions, which can be difficult when portfolios are invested in illiquid assets.
Instead of redeeming their shares via the manager, investors trade their shares on the stock market.
As there is no need to hold cash to meet redemptions, the AIC argued investment companies can provide more effective capital allocation, meaning that more of the funds raised are invested in the target asset class.
Due to their closed-ended structure and independent board, the AIC stated investment companies reduce some of the systemic risks that the International Monetary Fund considers arise when investments are made through open-ended funds.
Guy Rainbird, public affairs director of the association, said that the sector’s track record demonstrates that investment companies can be a compelling option for investors.
“The IMF has warned that open-ended funds create risks of ‘herding’ and excessive risk taking, particularly where investors cannot observe or oversee the portfolio manager.
“These concerns are addressed in investment companies by the independent board of directors who oversee the manager on behalf of the shareholders.”
He added that developing a more balanced funds market, with a regulatory and commercial environment that encourages the launch of investment companies across the EU, would be a major help in achieving the objectives of capital markets union.