Enter, the industry
Proposals already put forward by the FCA could still have an effect on how investment managers treat illiquid assets. As part of the consultation, which stems from the property fund gating fiasco of 2016, the regulator has proposed a new rule forcing relevant funds to suspend dealing if a specialist expresses uncertainty about the valuation of ‘immovables’ accounting for at least 20 per cent of assets.
The FCA’s proposals, which principally relate to non-Ucits retail funds such as property portfolios and are summarised in Box 2, also include the idea of preventing funds that invest in illiquid assets from holding large amounts of cash. This suggestion, which flies in the face of current practices in the sector, is intended to stop certain investors from having a “first-mover advantage”; a fund under stress would instead swiftly suspend dealing for all holders.
The regulator is not alone in attempting to better address the liquidity mismatch that can occur when funds buy illiquid assets but offer daily dealing.
Asset management trade body the Investment Association used a recent paper on its outlook for the next five years to introduce the concept of an open-ended “long-term asset fund”. While the exact details are under wraps until later this year, the IA said such a product would be able to move away from daily dealing.
“This new type of fund would have the ability to invest in less liquid or illiquid asset classes, and importantly to move away from daily dealing in units to reflect the nature of the investment strategy,” the body explained.
“The fund would be open-ended, able to receive new money to invest and for investors to redeem at appropriate time intervals, and would coexist with alternative forms of funds – notably closed-ended funds.”
Would these suggestions work? While commentators have been quick to demand responses to the Woodford crisis, the latest ideas have met with opposition from within the industry.
The investment trust space, in particular, has hit back at recent suggestions. Ian Sayers, chief executive at trade body the Association of Investment Companies, warned that the FCA proposal for funds to gate when there is “material uncertainty” around illiquid assets would harm investors by encouraging more frequent suspensions.
“It is difficult to accept that this should be the preferred regulatory option and I do not believe that consumers or the media will see it in these terms,” he said in a recent letter to Treasury Select Committee chair Nicky Morgan.
“Most retail investors see rights to redemption as fundamental. Far better would be to minimise the need for suspension.”
Mr Sayers added that investors’ existing preferences, discussed above, would hamper appetite for a long-term asset fund. As such, the IA has acknowledged that a long-term asset fund would be best suited to the likes of pension schemes. Others have suggested such products may need to offer something extra to prospective supporters.