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AIC recommends clearer disclosure of the risks of open-ended funds investing in illiquid assets

23 May 2017

AIC responds to FCA’s ‘Illiquid Assets and Open-Ended Funds’ discussion paper.

The Association of Investment Companies (AIC), in its response to the FCA's 'Illiquid Assets and Open-Ended Funds' discussion paper, has recommended clearer disclosure of the risks posed by open-ended funds that invest in illiquid assets. The AIC has also recommended that fund providers should explain why the chosen fund structure is appropriate for its underlying assets.

Ian Sayers, Chief Executive of the Association of Investment Companies said: “On performance grounds alone, there is a compelling case for investment companies when investing in illiquid assets. This is demonstrated by the substantial outperformance of the investment company Property Direct – UK sector in comparison to equivalent open-ended funds (see table below).

“The structural advantages of investment companies were also brought starkly into focus by the Referendum vote, when most open-ended property funds had to take some form of action in the light of changing sentiment, including repricing and suspending redemptions. Investment companies were not immune from market pressures, of course, and we saw discounts widen in the immediate aftermath of the Referendum result, though these have recovered since.  However, investors were still able to trade throughout this period if they chose to, instead of having to wait for months to sell.

“Even today, many open-ended funds are holding substantial amounts of cash to provide protection against redemptions, sometimes as high as 25% or more.  This is particularly relevant for income seekers, as such balances will be earning very low returns, whereas investment companies can remain fully invested, delivering a higher yield.

“The arguments in favour of using the closed-ended structure for illiquid assets are so strong that you have to question why the open-ended sector’s assets in UK Direct Property are four times bigger than the investment company sector.  So we are calling for clearer disclosure of the risks associated with a mismatch between the liquidity of the fund and its underlying assets, as well as asking fund promoters to justify their reasons for the fund structure chosen, and not simply to default to the open-ended option.”

Investment company vs open-ended performance – Property Direct UK

The Property Direct – UK investment company sector has outperformed the equivalent open-ended property companies over one, three, five and 10 years on a share price total return basis. Over five years to the end of March 2017 the average Property Direct – UK investment company is up 105%, whereas the equivalent open-ended property company is up 32.2%.  Over ten years to the end of March 2017 the average Property Direct – UK investment company is up 48.3%, in contrast to the equivalent open-ended property company which is up 20.3%.

Property Direct UK Investment company vs open-ended performance – share price total return (%)

Source: AIC using Morningstar (to 31/3/17) showing arithmetic average returns. Clean share classes used for open-ended funds.


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  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 345 members and the industry has total assets of approximately £164 billion.
  2. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance.  The value of investment company shares, and the income from them, can fall as well as rise.  You may not get back the full amount invested and, in some cases, nothing at all.


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