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What new fund liquidity rules mean for investors
The Financial Conduct Authority (FCA) is taking measures to address concerns about liquidity in the funds market. New rules are being considered which could see more frequent fund suspensions if there is uncertainty about the value of assets.
There may also be different redemption conditions for institutional investors to avoid retail investors being hit by a large investor choosing to withdraw a large sum of money in a single day. This follows a situation with Woodford Equity Income (BLRZQ62) where Kent County Council’s withdrawal was a key reason why dealing in that fund was subsequently suspended.
Three years ago several property funds suspended dealing following a rush of investors trying to take their money out amid concerns over Brexit hurting the UK property market.
From 30 September 2020 property funds which fall into a new category of ‘funds investing in inherently illiquid assets’ will have to be clearer in explaining liquidity risks to prospective investors.
They will be subject to enhanced oversight and will have to come up with detailed plans to deal with liquidity issues as they crop up.
So-called non-UCITS retail schemes which invest in illiquid assets will also have to suspend dealing if an independent valuation determines there is material uncertainty over more than 20% of a fund’s portfolio.
AJ Bell head of active portfolios Ryan Hughes says: ‘We welcome the FCA’s decision to look further into these solutions, among others, and while sensible suggestions we’d urge the regulator to move more rapidly to make changes, as these are real problems that investors are facing today.’
Hughes says the new rules enforcing a suspension if there is uncertainty over the valuation of 20% of a fund’s assets might see multi-asset funds suspend dealing if the property funds in which they invest are gated.
In turn, this could direct such funds to invest in property investment trusts or reduce exposure to illiquid assets below 20%, potentially undermining their diversification appeal to investors.
Ian Sayers, chief executive of the Association of Investment Companies, says retail investors should be able to invest in funds where they know from the outset how they will be managed and what their redemption rights are.
‘These should be reliable and should not change in response to foreseeable market conditions,’ he comments. ‘Unfortunately, the FCA’s proposals fail to achieve this. Disclosure of the many possible complex measures that might be applied is both inadequate and unfair.’
The FCA says its measures should be:
– Help investors understand better any restrictions on access to their investments and the circumstances in which these restrictions will be placed on the funds.
– Reduce the likelihood of a run, which could substantially reduce the value of investments for those left in the fund and possibly destabilise the market more widely.