The FCA has today issued a policy paper on illiquid assets and open-ended funds, a topic in sharp focus following the suspension of the Woodford Equity Income fund.
Ryan Hughes, head of active portfolios at investment platform AJ Bell said, “As expected, the FCA delayed the release of this paper after the suspension of the Woodford fund in order to consider the wider implication of illiquid assets in open-ended funds. The regulator states the Woodford saga highlighted that many investors aren’t aware of the liquidity risk they are exposed to and is looking at whether fund managers need to do more, including reviewing the appropriateness of daily dealing.
“The FCA is also looking at the inherent problems with having large institutional investors in the same fund as retail investors, particularly if they choose to withdraw a large sum of money in one day. We saw this play out in the Woodford situation, with Kent County Council’s withdrawal of its mandate being the final straw. As such, the FCA will look at whether different redemption conditions should apply to those institutional investors, in order to help protect retail investors.
“We welcome the FCA’s decision to look further into these solutions, among others, and while they are sensible suggestions we’d urge the regulator to move more rapidly to make changes, as these are real problems that investors are facing today.
“On property funds, the regulator has highlighted the continuing challenges that exist for property funds in the open-ended space. The FCA is pushing ahead with its plans to force funds to suspend dealing if there is uncertainty about the valuation of 20% or more of its assets. This means we’re likely to see funds suspend dealing more frequently and sooner than they would have done in the past.
“The knock-on effect of this is that multi-asset funds or funds of funds that invest in open-ended property funds may also have to suspend dealing if the property funds temporarily shut. As such, we could see multi-asset funds move towards closed-ended funds, such as investment trusts, for property exposure. In a worst case scenario we could see them restricting their allocations to these illiquid assets to below 20%, in turn reducing the diversification of the funds for investors.
“The regulator has backed down on its plans to stop property funds continually having a large cash buffer. This means we’ll see a continuation of the status quo, where property funds often have around 20% of their assets in cash, on which they charge the full management fee and which serves as a considerable drag on returns for investors.”