FCA boss Andrew Bailey has also weighed in on the subject, though he has continued to defend fund suspensions as a way to protect investors.
He stated in an article written for the FT after the Woodford fund gated: “This approach worked effectively in 2016 [when several property funds temporarily suspended dealing], though we at the FCA think the mechanism can be improved. A suspension should be used to protect all investors, those who remain invested as well as those seeking to redeem, by avoiding forced sales of the assets of the fund at what might be below current market values.”
The decision to hone current practices, rather than calling for a full overhaul of how funds are run, appears in part to be an acknowledgement that fund selectors themselves have little desire for change.
Ultimately, the problem of liquidity mismatches is nowadays driven by demand as much as it is supply: the entire retail investment industry is predicated on the idea of daily dealing. Advisers and discretionary fund managers’ own portfolio structures follow the same principles, and they have shown little interest in investment structures that do not do likewise.
The regulator is also conscious that investing in illiquid assets may become more, not less, important to investors in the coming years. Mr Bailey’s article also stressed: “We must not lose sight of the importance to our economy of supporting illiquid investments that will be vital to our future growth and success.”
Some illiquid assets have already been embraced by investors. Asset classes such as infrastructure and property have drawn interest because they can offer good levels of income, protect against inflation, and sometimes act as a diversifier against broader market movements.
But it is unlisted shares to which Mr Bailey was referring in particular. Companies are increasingly looking to the likes of private equity for funding – going public is no longer a goal that is shared by all businesses.
Public markets have been shrinking for several years, in part because fewer businesses are willing to face the setbacks that can occur when they list shares. This can include greater scrutiny and a higher regulatory burden.
Despite certain stock markets dwindling, the total number of corporate entities in existence has not fallen back in the UK. Companies House figures show that in the UK alone the number of companies has grown substantially. Around 4m businesses were on its register at the end of 2017, compared with 3.4m in 2014.
The behaviour of professional investors also reflects this shift in dynamics: asset managers are increasingly focusing on private markets (see Box 1).