The Financial Conduct Authority (FCA) is reviewing open ended funds that invest in such illiquid assets as property and infrastructure. It also potentially affects investments in private equity, unlisted securities and special purpose vehicles. If you recall, only a few months ago a number of property funds had to close to redemptions, i.e. investors could not get their money back, simply because of a minor panic over the impact of the Brexit Referendum vote. Although such funds do keep a cash buffer to cover day to day liquidity and can also adjust prices to deter redemptions, it seems this was not enough. The closures were mostly temporary but it highlighted the difficulties such funds can face.
The FCA have published a paper that covers the complex issues around this topic, and makes some suggestions to solve the problem (other than simply banning such funds). One is that “professional” investors might be treated differently to “retail” investors, i.e. there would be two classes of investors in the same fund. The principle behind this is that some investors might be more tolerant of short term fluctuations in fund values than others – for example retail pension investors may have a longer term horizon. How that would be reflected in the different treatment of multiple share classes is not clear.
Bearing in mind that only recently ShareSoc said to the FCA in a consultation response on their “mission” that we objected to “an artificial distinction drawn between wholesale and retail markets which does not and should not exist”. In other words, we would like all investors to be treated the same and there should be no prejudice against any one class, so it is unlikely we would support that proposal.
The FCA suggests a number of tools that fund managers could use to manage liquidity, or to warn investors about the risks of such funds. But why not simply ban them when there are alternative closed-end funds that provide exactly the same investment service – namely investment trusts? Such trusts do not have liquidity problems because they do not need to sell assets to meet redemptions (and it is the need to sell immovable assets in “fire sales” that cause the problem). Investors can sell their shares in the market at any time in investment trusts if they so wish.
It would seem that yet again the FCA is favouring the support of the institutions who manage open ended funds and profit from them, rather than those who invest in them, particularly retail investors. The latter often get advised to buy open-ended funds by IFAs and platform operators without being warned of the dangers they embody.
If you have views on this matter, let ShareSoc know as we will be submitting a response to this consultation.