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The current regulatory framework, the operational limitations of the platforms and the comfort blanket of daily liquidity has inhibited the development of funds for retail investors with different characteristics. The structural issues in dealing with retail investors’ model portfolios mirrors the challenges of investment in illiquid assets by defined contribution pension schemes and unit inked insurance products. Many investors are effectively paying a high cost for liquidity that they do not use, subsidising those investors who do need liquidity.
Hopefully a result of the challenges faced last year will be an impetus for product development for retail products, much as the events of 2008 were a spur for product development for institutional funds (discussed further below). Nothing much is likely to happen on this until the FCA publish the follow up to their discussion paper on the subject. This is expected in the Autumn.
Long term and permanent capital vehicles
The other change that we have seen in the last eighteen months has been a flurry of product development activity for long term and permanent capital vehicles for institutional investors. This was predicted in the 2012 report but took a while to materialise.
Initial activity post 2012 was in the conversion of existing funds. More recently we have seen the launch of new long term and permanent capital vehicles. The structuring issues identifed in the 2012 report are magnified by the changes in the market. Increasing rates of property transfer taxes and more effective anti-avoidance legislation has increased the cost of transacting in property.
At the same time, long term returns are expected to be lower and there is an increased focus on income rather than capital gains. There is less return to cover the cost of disposing of assets and reinvesting and the cost of winding up funds and raising new capital.
This is resulting in more open ended funds, more long term funds with liquidity windows and more externally managed REITs.