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Open-ended funds and illiquid assets
A bit of a blog, February 2019
There seems to have been quite a lot happening in the world of open-ended funds since the Autumn, so we thought that it would be a good time to compose a blog about the subject.
As we head, seemingy inexorably, towards a choice of humble pie or no pie, the risk of a "no deal" Brexit weigh increasingly on investors minds. We are already seeing significant redemptions out of some UK open-ended funds open to retail investors, although none have yet reached the point where they need to suspend redemptions. The reaction of the press to redemptions suggests that they did not receive the FCA note that they want to remove the stigma from suspending.
As we get closer to Brexit day, it is worth remembering that one of the issues in 2016 was that the referendum result was close to the quarter end and it was quarter end asset allocations rather than any panic on the day of the referendum that pushed funds into suspension. We have the same at the end of March with an even more condensed timetable. 29th March is the last working day of the month - the 30th and 31st are the weekend. The architecture of the investment platforms mean that allocation changes to the model porfolios through which an increasing amount of retail investment takes place are immediate. Events that encourage many model portfolios to reduce their allocation to real estate at the same time creates a significant risk of an unsustainable level of redemptions.
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 "Janus Henderson" later in this blog).
On the other hand, nothing major has changed. The FCA produced a consultation document in the Autumn, a year late and rather off target. This is discussed later too. If the FCA accept the industry's response to the consultation, we might get real progress in the future, but not in time to do anything for 29th March. 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 discussions on patient capital could also be positive, but will also take time.
Away from the funds for retail investors, the demand from institutional investors for semi open-ended funds continues to grow.