Investors to be denied access to top-performing funds
The FSA is looking to ban the sale of products such as UCIS and VCTs to retail customers following abuses that left many people out of pocket.
Private investors will be denied access to certain top-performing investments as a result of the FSA’s decision to ban the marketing and sale of unregulated collective investment schemes (UCIS) to retail customers.
The regulator has reviewed a selection of UCIS promotions to retail investors and concluded that only one in four met existing guidelines, leading it to propose a ban on all such schemes.
This means that investors will miss out on some products that have produced spectacular returns.
In May, FE Trustnet
showed the Freehold Income Trust to be the best fund on a risk/return basis over the last decade
The portfolio, which invests in freehold ground rents, has made 176.11 per cent since launch in 1997, while the FTSE All Share has made 125.46 per cent during this time, with much higher volatility.
Performance of trust vs indices since launch
Source: FE Analytics
If it retains its current status as an unregulated collective investment scheme, the fund will no longer be available to the man in the street, although as manager Nigel Ashfield told FE Trustnet
, the management team is trying to have the fund re-rated as a Property Authorized Investment Trust.
However, Julia Bassett, partner at actuarial and consultancy firm Barnett Waddingham, points out that the FSA had good reason for its decision.
"While it is easy to bemoan the lack of investment freedom every time the FSA imposes harsher restrictions, in reality it seems that it identified abuse which had already resulted in consumers being out of pocket," she said.
Bassett claims the situation needed action, as SIPP providers were expected to distinguish between genuine and scam investments when they were unlikely to be able to do so.
"Something had to be done as the situation was becoming untenable, and generally restricting alternative investments to high net-worth individuals seems a sensible route and is consistent with how we would expect our clients to invest," she added.
As the legislation stands, venture capital trusts (VCTs), some of which have produced spectacular gains, will also be barred to ordinary investors.
VCTs provide tax breaks in return for investment in fledgling companies, with higher risk the price to be paid for potentially sky-high returns.
In May FE Trustnet
reported that the Oxford Technology Trust, which invests in technology start-ups linked to the research of Oxford University, had a yield of 41.67 per cent
FE Alpha Manager Giles Hargreave
runs the Hargreave Hale AIM VCT 1, which picks companies traded on the AIM index; both these funds would be banned under the current proposals.
Hargreaves’ VCT suffered badly after the crash of 2008, but anyone who had bought it at the bottom in April 2009 would have seen their investment grow by 76.26 per cent since this time.
Performance of VCT since April 2009
Source: FE Analytics
Ian Sayers, director general of the AIC, said: "VCTs are listed investment companies overseen by an independent board and regulated by the listing rules and company law, in the same way that investment companies are."
"We will be calling on the FSA to exclude VCTs from the proposals, in the same way that investment trusts have been excluded."
AWD Chase de Vere’s Patrick Connolly says that he hope the FSA sees sense and allows the sale of VCTs to wealthy investors, although he says in general he is supportive of the regulator’s move.
"VCTs are only really appropriate for high net-worth clients who are better able to cope with the higher level of risk, but they certainly should be available to those investors."
"But there is little reason for the vast majority of investors to even think about unregulated investment schemes, so by making it more difficult to market them to investors the FSA is making a step forward," he finished.