James Coney  

IA’s tinker-proof fund could be problematic

James Coney

James Coney

There is a problem for the investment industry, and it is called tinkering. 

It is a highly unusual problem, because for decades it was practically impossible to get anyone to pay enough attention to their investments. They were left languishing on high charges and poor performance.

But now everyone is paying too much attention, stemming from innovation and technological advances. It has become so easy to check your investments through a fund supermarket that the temptation is to tinker with them all the time.

And you know what they say, time in the market is better than timing the market.

I do it myself. At least once a week I log on and see what my investments are doing, reading far too much into minor market movements. I do not trade much, but I can see how someone would. 

Alongside the rise of tinkering, we have a liquidity problem, and I am not talking about Neil Woodford’s Equity Income fund, though that is a unique set of circumstances that neatly sums up the issue.

Liquidity within property funds and among other assets, such as private equity, is higher on the agenda as their lack of flexibility puts them off the radar.

Tinkering plus a lack of liquidity equals a headache. It creates a bit of a conundrum at a time when the government wants pension funds to start taking bets on alternative assets.

The Investment Association has been working on a solution to this for the past year, and it has come back to the table with a proposal for an altogether new type of fund: a long-term assets fund that will be ‘tinker-proof’.

The fund would aim to get over the problem of liquidity by essentially gating investments during certain periods of the year. So if you want your money out you have to wait for a window – that may be at the end of the month, or even once a quarter – to get it back.

In exchange, the fund would be able to control withdrawals and so focus on more illiquid assets – unquoted stocks, private equity and property, the kind of stuff that has real problems if withdrawals are high.

It is a good idea, but a hard sell to retail investors, for whom the idea that you should put your cash into something where it is locked away could be problematic.

Long-term investing is a hard concept for savers, and it is where financial advisers can really add their worth. Proper financial planning is tinker-proof, and is focused on long-term goals rather than short-term market movements. 

And of course, the success or failure of any long-term asset fund will hang on two things: cost and performance. That’s something the IA cannot plan for.