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.
“While we welcome what the IA 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,” said Rebecca O’Keeffe, head of investment at platform Interactive Investor.
“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.”
Case closed
Many in the industry, including Money Management columnist Russell Taylor, have argued that investment trusts already offer a good home for illiquid assets. With exiting investors selling their investment trust shares to others rather than redeeming cash directly from a fund, closed-ended offerings are not forced to quickly sell assets at a time of waning demand.
Investors have certainly turned to closed-ended products for exposure to more esoteric assets of late: the first half of 2019 was the best ever six-month period for fundraising by existing investment trusts, with £4bn raised in the secondary market.
The AIC put this down to the popularity of trusts that buy less liquid assets, such as property and infrastructure.
However, closed-ended funds are not without their own weaknesses. If investors start selling an investment trust’s shares in large numbers this will push down the share price, meaning those determined to exit may have to crystallise a loss.
