The UK regulator has unveiled plans for a new fund structure that would allow investors to allocate money more efficiently to illiquid assets, following concerns that conventional investment funds that offer daily liquidity are no longer appropriate.
The Financial Conduct Authority has launched a consultation on so-called ‘long-term asset funds’, which would be designed specifically for investments in less liquid assets such as property, infrastructure and private equity.
The consultation comes after the Investment Association, the trade body for UK asset managers, tabled the idea for a long-term asset fund last year, claiming it would be beneficial for some pension schemes who wanted to target returns by investing in illiquid assets.
Investment fund liquidity has been thrown into the spotlight following the suspension of UK property funds after the EU referendum vote in 2016, and more recently around the onset of the Covid pandemic.
Funds managing billions of pound in real estate assets were forced to suspend in March 2020 after they were unable to obtain accurate valuations on their holdings amid national Covid lockdowns. The majority, including property funds managed by Aberdeen Standard Investments, Columbia Threadneedle and L&G, have since resumed dealing.
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Under the FCA’s proposals, long-term asset funds would have longer redemption periods, higher levels of disclosure, and liquidity management and governance features which differ from conventional open-ended funds, which offer investors the opportunity to withdraw money daily.
“Investors can already invest in such assets through closed-ended structures, or a range of private structures. But some investors prefer investing in open-ended funds where there are opportunities to put money in or take it out at the net asset value of the assets,” the FCA said in a statement.
“However, as seen with property funds, open-ended structures investing in illiquid assets can face problems if they offer daily dealing to investors.”
The FCA said the new fund structure would appeal to experienced retail investors and defined contribution pension schemes in particular, which may look to boost their allocation to illiquid assets.
The regulator pointed to a recent survey commissioned by the Department for Work and Pensions, which found that two thirds of these schemes do not invest in illiquid assets, while the remaining third invest between just 1.5% and 7%.
Nikhil Rathi, chief executive of the FCA, said: “We think our proposals would enable the establishment of authorised funds that are appropriate for both professional investors and sophisticated retail investors that want this type of investment risk and opportunity.”
He added: “This new type of fund may also be more attractive to DC pension schemes that have long investment horizons and who, under current fund structures, find it difficult to invest in these types of assets.”
The FCA added that it would delay its final policy position on how to deal with issues around property funds in particular following a consultation last year.
Among proposals put forward, the regulator suggested investors in property funds should give between 90 and 180 days’ notice when wanting to withdraw their money.
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The regulator said it would not make a final decision on property funds until the third quarter at the earliest, so that it can take feedback from the long term asset fund consultation into consideration as well.
Ryan Hughes, head of active portfolios at AJ Bell, said: “The news that the FCA is delaying the conclusion of the consultation and linking it in to a consultation on long term asset funds shows just how hard property asset managers have lobbied for the FCA to take a different approach.
“However, the initial proposals haven’t been completely discounted and may well still come back on the table when the FCA reports back later in the year. The simple fact that two property funds remain suspended and have been for over a year, while many others hold more than 20% cash to meet potential short-term redemptions, still implies that the current structure needs addressing sooner rather than later.”
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