AIC calls for new rules on open-ended funds

AIC calls for new rules on open-ended funds

The head of the Association of Investment Companies (AIC) has called for new rules for open-ended funds in order to 'prevent another Woodford'.

Ian Sayers wrote to Nicky Morgan MP, outgoing chair of the Treasury select committee, warning the circumstances that led to the suspension of the Woodford Equity Income fund were an industry wide issue rather than a one-off event, as he urged MPs to introduce new rules for open-ended funds that hold illiquid assets.

Mr Woodford’s flagship fund was suspended on June 3 as outflows, which were running at £9m every working day in May, had caught up with him.

The fund was at risk of breaching the 10 per cent rule on illiquid assets, which it had breached twice previously, and the forced suspension will now run until at least December. 

Mr Sayers wrote to the MPs to urge them to introduce a rule requiring open-ended fund providers that run products with illiquid assets to be forced to explain why they believe an open-ended fund is the appropriate structure to hold the assets. 

He wrote: “This would include consideration of the type of investor, the nature of the underlying assets, the redemption policy, the likely levels of cash holdings and the possible impact of these arrangements on investment performance.

"This would be required when products are launched and annually thereafter. 

"A critical outcome would be to create a business culture within [authorised fund managers] which considers the consumer interest.

"It would also create a mechanism of accountability if the fund does not perform as promised."

FTAdviser has previously reported how open-ended property fund managers have increased the level of cash in their funds in recent months.

In the weeks after the UK voted to leave the EU, many open-ended property funds were forced to act in the way Woodford has, by suspending withdrawals.

Having a high level of cash in the fund means this can be averted, though the drawback for investors is that not all of their money is invested in the asset class they want, while the cash component contributes little to the performance of the investment.

Mr Sayers said: “A prudent regulatory regime might require higher cash buffers. The outcome will be an even greater performance deficit for retail investors, creating disincentives to diversify their portfolios and making it harder for them to reach their financial goals for retirement.” 

He has asked members of the Treasury select committee to support his proposal and urged the FCA to consider his plan.

Ms Morgan has ceased to be chairman of the Treasury select committee as a result of her taking a cabinet job under the new prime minister. An election will now happen to find a replacement.