Scott Gallacher director at Rowley Turton says: "For example when the underlying stocks are down, there is no need to hold a damaging fire-sale to satisfy redemptions.
"When stocks are high, there’s no need to dilute performance by buying in extra shares at a premium.
”Also, the fund holders are not at the mercy of the fund manager suspending the fund, that is, they should be able to sell their unit holdings to another investor regardless of the underlying fund position.”
As closed-ended vehicles are companies in which investors buy shares, they do not need to sell assets to meet redemption requests and so are more suited to holding illiquid assets such as physical property, infrastructure or small/unquoted companies.
“However, care needs to be taken as the liquidity of the fund’s shares should be analysed and these may become illiquid themselves if the trust is very small, for example,” Mr Lloyd cautions.
The FCA is currently undergoing a probe into ACD activities, in the wake of the Woodford Equity Income fund debacle.
Mr Pursglove says: “I would have thought it is quite right some investigations into the holding of either less liquid or illiquid assets in open ended portfolios, that might for instance, result in some hard lines being out in place or there might be a broader moratorium on illiquid assets being held at all.”
So is there a place for illiquid assets in open-ended structures?
Mr Pursglove says: “The answer is probably, yes, there is a place for them, but the [correct] question is not whether there is a place for them, but at what quantum is there a place for them?
“The idea of portfolios holding 20 or 30 per cent in illiquid assets which I would not consider to be an acceptable level, but if there is a relatively small exposure to illiquid assets of sub-5 per cent on an allocation, depending on what that asset class is and depending on how liquid the other assets are in it, then they may have a part to play in a portfolio.
“But I would have thought the findings of any investigation will more than likely take a hard line on illiquid assets being held in open-ended funds in general terms.”
Investors should take extra care when investing in illiquid assets via an open-ended vehicle.
Mr Lloyd says they should ensure that they are taking the illiquidity into account and that their investment horizon is sufficiently long to accommodate this or within a suitability diversified multi asset portfolio.
He adds: “They should also ensure that they are comfortable that the illiquidity risk is being adequately compensated through additional yield or potential for long term returns.”
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