The Investment Association will create a new fund structure which would not offer investors daily liquidity.
Investors in funds in the "long-term assets fund" structure would not allow investors to access their cash at a day’s notice, as is the case with other funds in the Investment Association sectors, and instead will offer less regular liquidity.
The precise details of the level of liquidity offered and other elements of the structure will be disclosed later in the year as part of a paper released by the IA.
The aim is for the fund structure to allow investors in areas such as infrastructure and renewable energy to have access to an open-ended fund structure.
Those assets are more typically held within investment trusts due to the fact they cannot usually be sold quickly, and so would not have daily liquidity.
Investment trusts offer daily liquidity even within illiquid assets because investment trust shares are listed on the stock exchange, and so can be bought and sold on a daily basis, with the underlying assets not needing to be sold.
The issue of liquidity in open-ended funds is particularly relevant to investors due to Neil Woodford having to suspend dealing in his Equity Income fund, as he was unable to sell illiquid assets quickly enough to meet the flood of redemptions.
In the immediate aftermath of the UK’s vote to leave the EU in 2016, many open-ended property funds were forced to suspend redemptions, as the fund managers were unable to sell property fast enough to meet demands for cash from investors.
Commenting on the proposed new fund structure, Rebecca O’Keefe, head of investment at platform Interactive Investor, said: "As with the suspension of several property funds in the wake of the UK referendum, the more recent Woodford Equity Income Fund suspension has shone a very harsh light upon the question of liquidity in open-ended funds.
"Whilst we welcome what the Investment Association is aiming to do in proposing a new structure that could be supportive of less liquid assets such as private companies and infrastructure, we question why it should come with strings attached.
"If open-ended funds want the right to invest in illiquid assets without the accompanying obligation to offer daily access to their own investors, as an advocate for our customers we wonder what exactly is being offered that might entice eligible investors to sacrifice liquidity when buying into these funds?
"Given that the proposed long-term asset funds are able to limit withdrawals to brief windows that open every month or quarter, investors will reasonably ask ‘What do I get in exchange for this lack of liquidity?’
"It is arguable that illiquid assets would be more sensibly packaged in closed-end investment trusts which do not need to respond to demands for redemption. Instead, the Investment Association is attempting to create a new hybrid open-ended fund structure, one that oscillates between lock-in periods and redemption periods."
Steven Cameron, pensions director at Aegon, said the funds could serve a useful purpose for pension savers.
He said: "Within the pensions world, many savers in the accumulation phase have very long savings horizons and might benefit from sacrificing daily liquidity for the opportunity to increase their exposure to illiquid assets, albeit within a diversified portfolio. There are different considerations for those taking an income from their pension, where sufficient liquidity is clearly more important.
"As the IA says, such funds are less likely to be appropriate in the mainstream retail fund market, and are best suited for individuals who have taken advice. This does raise challenges around how to incorporate them into workplace defined contribution schemes, particularly in an auto-enrolment environment."
Chris Cummings, chief executive of the IA, said: “The IA’s proposals to help develop a new long-term asset fund will respond to changing customer needs and support the financing of companies and public projects.
"With the UK set to leave the EU over the next few months, these proposals will also help future proof the UK’s investment landscape, ensuring it can remain competitive on a global scale and allowing international investors to benefits from innovation in our country’s fund regime."
david.thorpe@ft.com
What do you think about the issues raised by this story? Email us on fa.letters@ft.com to let us know.
