- The FCA has launched a consultation on fair redemption terms for funds investing in illiquid assets (source: CP26/35: Fair redemption terms for authorised funds investing in illiquid assets | FCA)
- Consultation seeks to address the issues which can arise when investors wish to exit a fund invested in illiquid assets
- The FCA proposes introducing a minimum notice period for certain funds to better reflect the time it takes fund managers to sell underlying illiquid assets
- The consultation also highlights the complexities involved in investing in private markets
- Why AJ Bell’s investment team typically avoids this area of the market
Paul Angell, head of investment research at AJ Bell, comments:
“This consultation is a timely reminder that liquidity matters. Funds investing in inherently illiquid assets can present real challenges if investors are promised quick access to their money in a fund where the underlying holdings may take weeks or months to sell.
“History has shown the problem with this mismatch. In periods of stress, investors who move quickly may be able to get out while there is still cash or more liquid assets available in the fund, leaving those who remain behind exposed to the possibility of declining performance, dilution and, in the worst cases, suspension. That is a clear threat to consumer investment outcomes and can have damaging long-term consequences for confidence in investing.
“If a fund owns assets that cannot be sold quickly without imposing costs on other investors, that is clearly an issue and it is sensible that redemption terms will be looked at by the regulator. That said, imposing a lengthy notice period to get money out of a fund is not going to appeal to a lot of investors, so the implications of these proposals need to be considered carefully.
“Additionally, strengthening disclosures around waiting times and the associated market risk - time in the market between sell order & dealing cut off - is inherently difficult due to the complexity, and the proposals will likely present operational challenges for platforms, model portfolio services (MPS) and other parts of the distribution chain.
“AJ Bell’s investment team has typically been cautious about funds where the promised liquidity does not match the reality of the assets held. If liquidity relies on large cash buffers or the ability to sell illiquid assets quickly, especially when that needs to be done in challenging markets or when the fund is in a position of weakness, we’d rather keep a wide berth.
“Instead, our investment approach is built around keeping things simple, low-cost and transparent. We have therefore generally avoided private markets and funds with challenged liquidity, as valuations can be harder to assess, exiting might not be straightforward and fees are typically higher. Our investment portfolios therefore solely use daily-dealt funds that we deem to have sufficient liquidity, helping us deliver investment outcomes to our clients and customers where they feel safe, valued and in control.”