“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.
Another possible solution for open-ended funds – and one hinted at by the FCA in its 2018 consultation – comes down to making investors more aware of liquidity risks: those looking at funds operating in potentially illiquid markets, from property and unquoted shares to small-cap equities and corporate bonds, could be warned of sporadic difficulties around trading.
However, it is important to note that problems can be resolved over time. H2O, for one, argues that the recent outflows from its funds have only proved the “resilience” of its teams.
Similarly, Gam, which found itself in crisis last year because of questions about illiquid bonds in some of its funds, gradually sold off those assets and said in July it had liquidated the relevant portfolios at a premium to their pre-liquidation valuations. The property funds that gated in 2016 also managed to reopen, though there are still questions around when the Woodford suspension could come to an end.
With no silver bullet available just yet, intermediaries need to make sure their clients understand the realities of investing in such assets.
