Our specialists give their views on a new type of open‑ended fund.
As the FCA finalises rules for a new type of fund, the Long-Term Assets Fund, interactive investor, the UK’s second-largest DIY investment platform, comments.
Dzmitry Lipski, Head of Fund Research, interactive investor, says: “While initially intended for ‘pension funds’ or ‘sophisticated’ or ‘wealthy’ private investors in the first instance, we are particularly mystified about why wealthy investors warrant special treatment. We are also alarmed that there are already plans to consult next year on wider retail distribution.
“Wealthy or not, open-ended funds are not the best structure for illiquid assets, and it isn’t rocket science to work out why - we have seen the fall-out from open-ended funds investing in illiquid assets time and again. The 90-day redemption notice period doesn’t feel long enough to us, either. Using European property funds as a case in point: in Germany the regulator Bafin requires investors to give 12 months’ notice to redeem units in open-ended property funds.”
Kyle Caldwell, Collectives Specialist, interactive investor, says: “On the one hand, the idea is a sensible one, as this proposed new structure will protect investors under a scenario where there is a ‘run’ on the fund – a large number of investors asking for their money back at the same time.
“On the other hand, this is an untested model and it’s hard to see how you can get around the shortcomings of the open-ended fund structure for investing in illiquid assets. Especially with a minimum mandatory notice period of ‘at least 90 days’ – no time at all in a liquidity crisis.
“If these funds cannot be bought, then investors have a solid alternative to fall back on – investment trusts. One of the main structural advantages investment trusts have is a fixed pool of assets, for which a fixed number of shares is issued, raising a fixed amount of money for the manager to invest in a portfolio of assets. This is the reason why the investment trust form is much more appropriate for holding illiquid assets than the use of open-ended funds.
“The LTAF seems to offer investors some sort of halfway house between open-ended funds in their current form and an investment trust, as they are seeking to limit daily withdrawals, but without putting a limit on how much can be invested on a daily basis.”
“For those investors who want to ensure a fund manager is not forced either to sell or to buy shares depending on whether they are attracting or losing investors, the investment trust structure is still the only option.”
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