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Investment Association plots long-term asset funds following Woodford issues | Trustnet Skip to the content

Investment Association plots long-term asset funds following Woodford issues

26 June 2019

Mixed reactions to industry trade body’s plans for new fund structure for long-term assets.

By Rob Langston,

News editor, FE Trustnet

The Investment Association (IA) has unveiled plans to create a new fund structure for illiquid assets such as real estate, private equity and debt.

Proposals for the new fund structure follow the gating of Neil Woodford’s flagship LF Woodford Equity Income fund, which was shuttered at the start of the month as mounting outflows caused concerns over its liquidity.

The IA said the new fund structure would allow investors to access a wider range of assets and provide companies and infrastructure projects with much-needed funding.

It noted that “it is more important than ever” that the investment industry is underpinned by strong customer protection and the highest standards of fund governance and disclosure.

In addition, there is also a fundamental question of how to ensure investors can access investments beyond more liquid, public markets, “especially at a time when the number of publicly listed companies is falling in the UK and elsewhere”.

“Our view is that there is a clear and important role for daily priced, daily traded funds, providing customers with access to a wide range of investment strategies and asset classes,” the trade body noted. “At the same time, some asset classes do not lend themselves to daily liquidity.”

A blueprint for the new open-ended fund structure will be unveiled late this year, although it will move away from daily dealing to reflect the long-term nature of the investment strategies.

The new structure would be able to receive new money while allowing existing investors to redeem at appropriate time intervals.

Chris Cummings (pictured), chief executive of the Investment Association, said the move is a response to changing investor needs and will support the financing of companies and public projects.

“With three-quarters of UK households using the services of an investment manager, our vision for the future is focused on our customers, ensuring they can get sustainable, long-term returns from their investments,” he added.

“In getting this right, we will also make sure that funding flows effectively through the economy, helping companies grow and public infrastructure to be financed, meeting the needs of future generations.”

In addition, it is unlikely that the new fund structure will be offered to the mainstream retail funds without first passing suitability tests.

 

The move has been met with mixed reactions from financial advisers and investment professionals.

“Numerous studies have shown that patient buy-and-hold investments have the best chance of success and moving in and out of funds can not only disadvantage the individual investor but the entire group too, as we have recently seen,” said Tom Sparke, investment manager at GDIM Discretionary Fund Managers.

“As long as it was made clear to investors that money in the fund may not be readily accessible, it should work well.”

However, Patrick Connolly (pictured), chartered financial planner at Chase de Vere, said that illiquid investments are not generally suited to an open-ended investment structure.

“The ‘long-term asset fund’ proposal from the Investment Association seems to limit flexibility for investors to cater to the investment industry’s own shortcomings,” he said. “This is not a good solution.

“While other industries and companies are focused on meeting client needs and putting clients first, it seems rather strange that the investment industry should be taking the opposite approach. 

Connolly added: “If investors want to invest in illiquid assets, they either accept the illiquid nature of open-ended funds or select a closed-ended alternative.”

The liquidity issue has become much more prominent recently because of Woodford’s stature in the industry, but Connolly said it is unlikely to be a regular occurrence.

“If it is then something is going drastically wrong,” he said. “Hopefully Woodford is an exception to the rule where the perfect storm of excessive hype, poor performance, illiquid holdings and negative publicity combined to create the debacle.”

Ryan Hughes, head of active portfolios at AJ Bell, said that the problem is that it has become normal for funds to offer daily trading and that the industry will face the challenge of “resetting customer expectations that they can sell their investments immediately”.

He explained: “Moving away from daily traded funds would allow fund managers to make genuine long-term investments because they will have much greater visibility of when they might need to sell underlying assets to meet customer redemptions.

“This has long been discussed for property funds but would suit all kinds of investments such as unquoted businesses, small-cap stocks, infrastructure projects and fixed interest, especially high yield bonds.”

Hughes added: “There will need to be effective education around why having a longer notice period for selling investments offers a degree of customer protection when investing in certain asset types.

“People accept it for certain savings accounts in return for a higher interest rate, so it is certainly possible for investments too.”

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