The Association of Investment Companies (AIC) has pushed the Financial Conduct Authority to consider how closed-ended funds could improve competition in asset management.
In its response to the FCA’s asset management market study interim report, the trade body said active management in the investment company sector delivers strong performance for consumers, often outperforming their closed-ended peers.
The interim report said a number of active and passively-managed open-ended funds underperform their benchmark after fees, and suggested funds should add an independent board to ensure that management is in the interest of clients.
Closed-ended funds operating in equivalent sectors have beaten their benchmarks more frequently than actively managed open-ended funds over five and 10 years, according to AIC research.
Investment companies already have independent boards of directors who work in the interests of shareholders, said AIC chief executive Ian Sayers. These boards oversee the investment manager and monitor the level of fees paid by clients.
“Active management in the investment company industry delivers strong performance for consumers. Investment companies have beaten their benchmarks more frequently than open-ended funds over the medium and long-term. Investment companies are also most likely to outperform open-ended funds with the same manager over five and ten years.”
More than half of investment companies outperformed their benchmark on both a share price basis and net asset value (NAV) basis over 10 years, while 42 per cent of open-ended funds beat their benchmark on NAV basis.
The AIC recommended that the asset managers who offer collective investments be required to consider whether their fund structure suits the nature of their underlying assets.
More illiquid assets, such as property and infrastructure, tend to withstand shocks better than their open-ended competitors. This was demonstrated last year when a number of open-ended funds suspended trading after the UK’s vote to leave the EU caused investors to flee from property.
Consideration of fund structure help regulators ensure that funds remain competitive while keeping focus on client outcomes.
The trade body also encouraged the regulator to consider how it can enhance the impact of the Retail Distribution Review, which put closed and open-ended funds on an even playing field. Steps should include examining whether any long-term barriers exist that prevent independent financial advisers from using investment companies.
“Greater use of investment companies has the potential to increase competition because they offer a genuine alternative to open-ended funds,” Mr Sayers said.
