Will the FCA's plans to fix open-ended property funds work?

Will the FCA's plans to fix open-ended property funds work?

The Financial Conduct Authority's proposals for long-term asset funds might mean some assets are not useable in model portfolios, according to guests on the latest edition of the FTAdviser Podcast.

Over the past few years the so-called liquidity mismatch has meant property funds have been forced to open and close themselves to redemptions repeatedly, first in response to Brexit and then because of the coronavirus pandemic.

To fix this the Financial Conduct Authority has proposed a new type of fund: the long-term asset fund, which would have "liquidity tools" which could include notice periods, deferred redemptions or limits on the amount of a fund which can be redeemed during a set period.

Speaking on the podcast Ryan Hughes, head of active portfolios at AJ Bell, said: "If I'm saying, on the one hand, that I'm offering you daily access to my product then it's incumbent on me as the fund manager to make sure that within that the assets I hold and I invest offer the same type of liquidity underneath.

"So what that might mean if we go down this structure is that certain asset classes are not useable for model portfolio solutions and that might not be a great outcome. Or we simply find a different structure.

"Maybe we use the investment trust structure which is already there, where we accept that the trade off for liquidity is we get a lower price. The solutions in some respects already exist, it's just that some parts of the market - certain platforms - can't facilitate it and people think there's only one answer to this."

Hughes said AJ Bell has zero-weighted commercial property in its active model portfolio service because it was worried about suspension risk even though its mathematical model said it should allocate to it.

Mike Barrett, consulting director at The Lang Cat, expressed concern that some advisers and investors now saw illiquid assets as inherently bad - which he said might have been a factor behind Aviva's decision to wind up its open-ended property fund.

He said: "My experience of advisers through the Woodford episode [...], a lot of advisers became very, very nervous around the word 'liquidity' and I think it's probably fair to say there were a few advisers who perhaps didn't understand the issue.

"But more importantly their clients started getting nervous about illiquid assets and [...] the industry needs to understand this and explain what's going on here.

"There is definitely a cohort of advisers and certainly clients who will see the words 'illiquid assets' and think that is automatically a bad thing and will want to get away from it.

"I suspect that's what's happened with Aviva and some of the other property funds, where they have opened up again and have seen the redemptions, and it's just people making knee-jerk reactions perhaps and just wanting to get out of something that they perceive to be risker than it probably is."