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IA’s proposed new fund structure for illiquid assets no panacea

4 July 2019

The Investment Association is set to create a new fund structure, offering investors the opportunity to invest in illiquid, long-term assets.

Investors would have the ability to invest in assets such as property and infrastructure projects, but would not be able to access their cash at short notice, as is the case with other funds in the Investment Association sectors.

Commenting on the proposed fund, Chris Cummings, chief executive of the Investment Association (pictured), said the long term nature would respond to changing customer needs as well as support the financing of companies and public projects.

He said: “With the UK set to leave the EU over the next few months, these proposals will also help future proof the UK’s investment landscape, ensuring it can remain competitive on a global scale and allowing international investors to benefits from innovation in our country’s fund regime.”

Steven Cameron, pensions director at Aegon, welcomed the initiative for offering investors a new route to invest in illiquid assets, while also opening up a new source of capital to new, innovative companies.

He said: “Within the pensions world, many savers in the accumulation phase have very long savings horizons and might benefit from sacrificing daily liquidity for the opportunity to increase their exposure to illiquid assets, albeit within a diversified portfolio. There are different considerations for those taking an income from their pension, where sufficient liquidity is clearly more important.”

However, Cameron warned that with such funds less likely to be appropriate in the mainstream retail fund market, there will be challenges around how to incorporate them into the workplace defined contribution schemes, particularly in an auto-enrolment environment.

He added: “Further consideration will be needed to think through whether and which illiquid assets have a place in default funds, with careful governance. There’s also a question over whether members would be comfortable with a move away from daily pricing or restrictions on their current ability to switch funds or transfer to a new scheme at any time.”

While the Association of Investment Companies (AIC) agreed that investment in illiquid assets offers many benefits to investors, it said the new fund will not address many of the fundamental issues raised by the recent suspension of the Woodford Equity Income Fund. Investors were blocked from withdrawing money from the £3.7bn fund earlier this month, after the fund fell into trouble following concerns about unlisted holdings.

Ian Sayers, chief executive of the AIC, commented: “The ability to sell your shares or units at a time of your choosing has been the linchpin of fund regulation for decades.  This principle should not be abandoned without careful consideration of the implications for ordinary investors. As recent events have shown, a fund does not have to hold a significant amount of illiquid assets to run into trouble.

“Looking at the FCA’s recent proposals for open-ended funds investing in illiquid assets, we appear to be heading towards a world with less frequent redemption opportunities for investors, more frequent suspensions and the likelihood that open-ended managers will hold ever greater amounts of cash, reducing investment returns.”

The AIC said it would like to see the asset manager planning to offer an open-ended fund investing in illiquid assets publish its view on why the structure chosen is in the best interest of consumers. This breakdown 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 factors on investment performance.

Sayers added: “There are many commercial reasons why asset managers favour open-ended funds over closed-ended funds, even when it is clear that the closed-ended structure is better suited to illiquid assets.  We believe the time has come to put consumers’ interests first.”

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