AIC comments on Bank of England's financial stability report

The Association of Investment Companies (AIC) has commented on the Bank of England’s Financial Stability Report, which sets out the Bank’s concerns about open-ended funds that invest in illiquid assets and establishes new principles for fund design to address these problems.

Ian Sayers, Chief Executive of the Association of Investment Companies (AIC), said: “The risks posed by open-ended funds that hold illiquid assets have once again been laid bare in the Bank of England’s Financial Stability Report.  The report acknowledges that the structure could create systemic risks as well as leading to unfair outcomes for investors.

“The Bank of England’s report suggests that a combination of longer redemption periods and discounted prices for investors leaving the fund could be used to reduce systemic risks. However, we are not convinced that using pricing adjustments to manage the flow of redemptions will work. It would also be extremely confusing for consumers.

“If the discount that is applied increases at times of market stress, investors will still be incentivised to leave the fund earlier, before these pressures become acute.  This ‘first mover advantage’ is a primary cause of systemic risk and needs to be eliminated.

“These problems could be avoided by our proposal for ‘reliable redemption’, where the redemption terms of open-ended funds are fixed at the outset and matched to the time it would take to sell the assets in an orderly market.  This would be much simpler to convey to investors and does not penalise them simply for wanting to leave the fund. It also avoids flooding a weak market with assets at low prices and protects against systemic risks.”

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Notes

1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 362 members and the industry has total assets of approximately £199 billion.
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