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Open-ended funds and illiquid assets

Updated blog, May and July 2019

 

This is a May update to a blog that we originally published in February 2019, that you can find here. It also includes a brief additional section at the end added in July following the Woodford scandal and the Bank of England response to it. There had been a flurry of regulatory activity since the Autumn and we were rapidly approaching the date for Brexit on 29th March. Clearly this did not happen, but another cliff edge approaches on 31st Ocober.

 

This updated blog also looks at possible changes to allow retail investors and defined contribution pension schemes to invest in "patient capital" investments. These could be positive, but will take time.  Away from the funds for retail investors, the demand from institutional investors for semi open-ended funds continues to grow. This is also discussed at the end of this blog.

 

Brexit

 

The problems faced by property funds in the immediate aftermath of the EU referendum vote are well documented. John wrote the comprehensive report for the Association of Real Estate Funds "A review of real estate fund behaviour following the EU referendum".  You can find it here.

 

So are we now in a better position than we were in 2016?

 

On the plus side, at least if avoiding suspension is the main concern, funds are holding a higher proportion of cash, and seem to be selling assets ahead of redemptions rather than reacting after the event. Some managers are taking steps to change the way in which their funds price subscriptions and redemptions (see "Dual Pricing" later in this blog). This is unlikely to have a significant impact in the short term, but may influence behaviour in the longer term.

 

On the other hand, nothing major has changed. The FCA produced a consultation document in the Autumn, a year late and rather off target.

 

If the FCA accept the industry's response to the consultation, we might get real progress in the future. Both the announcement of the consultation and the recent comments from the FCA that it was monitoring redemptions from retail funds on a daily basis prompted further redemptions.

 

The FCA consultation and the industry response is discussed in detail below.

 

The FCA consultation on open-ended funds

 

The FCA ran a consultation on open-ended funds and illiquid assets (CP18/27), published in October and which closed on 25th January. John contributed to industry responses. This was a follow-up to responses to its 2017 discussion document DP17/1 which was published in February 2017 and ran until May 2017.

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