Long-term asset funds: “A square peg in a round hole”.
The Association of Investment Companies (AIC) has responded to the proposals made in the Investment Association UK Funds Regime Working Group’s Final report to HM Treasury Asset Management Taskforce. The AIC agrees that there is a broader debate to be had about the future of fund regulation in the context of Brexit but has significant concerns about the proposed Long-Term Asset Fund (LTAF).
Ian Sayers, Chief Executive of the Association of Investment Companies (AIC), said: “We welcome the paper’s acknowledgement that ‘daily dealing is not realistic for funds investing in highly illiquid assets.’ This has been borne out by the experience of open-ended property funds that offered daily redemption and had to be suspended during the financial crisis and after the Brexit referendum.
“We have also previously raised concerns that suspensions and other measures to manage liquidity problems are increasingly being portrayed as if they were part of the expected operation of an open-ended fund. We were therefore pleased to see IOSCO (International Organization of Securities Commissions) reconfirm its view that this is not an acceptable outcome for investors when it recently stated:
‘[Open-ended funds] should not be managed in such a way that the investment strategy relies on any additional ex-post measures such as suspensions. These measures are not a substitute for sound liquidity risk management from the outset, so that the dealing frequency of units meets the anticipated liquidity needs of the fund under normal and foreseeable stressed market conditions.’
“We believe this is the correct approach to take. Some of the proposals in the paper to allow a wider range of options for dealing with liquidity problems seem to run counter to this. If, as IOSCO believes, measures such as suspension should only be used in exceptional and unforeseeable market conditions, we struggle to understand, for example, why LTAFs should be allowed to continue to accept new money whilst suspending redemptions.
“Even if some of these measures are acceptable to institutional investors, we still do not believe that they are appropriate for retail consumers. Nor would they prevent the kind of systemic problems recently identified by Mark Carney when he spoke at the Treasury Select Committee.
“Potentially investors would face a myriad of different arrangements with dealing periods ranging from daily to two years or more and a wide variety of restrictions on their freedom to redeem their investment. In what is already a complex funds market, it is essential that these funds are clear about the choices they have made and why. For this reason our recommendation remains that an asset manager planning to offer an open-ended fund investing in illiquid assets should publish its view on why the chosen structure is in the best interest of its investors.
“We were also surprised by the paper’s comment that investment trusts would not be a potential solution to some of the issues identified because ‘there is also an additional cost and considerable transparency around listing on an exchange which can be unappealing for managers.’ Given the type of assets that the LTAF will be holding, which are inherently difficult to value, we believe the case for high levels of transparency are stronger and that the transparency a listing provides has worked well for investment companies, their managers and, most importantly, their shareholders.
“The paper raises some important and valid questions about the best way to channel investment into illiquid assets. However, it proceeds from the assumption that an open-ended fund must be the best way to achieve this. Until this perspective changes, it will always be a case of trying to fit a square peg into a round hole.
“We shall consider the paper in more detail in the coming weeks and provide a more detailed analysis of our conclusions.”
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- 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 360 members and the industry has total assets of approximately £193 billion.
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