Investment Association to create 'long-term' fund structure

Investment Association to create 'long-term' fund structure

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."