Responding to the FCA’s proposed changes for illiquid funds, Ryan Hughes, head of active portfolios at investment platform AJ Bell, comments:
“The proposals from the FCA will mean that property funds are likely to suspend trading sooner and potentially more frequently than they have in the past. The rules from the regulator suggest a fund should suspend when a valuer has uncertainty about the price of 20% of the fund’s assets. This means that when there is even a small amount of uncertainty in the market affecting the value of property and infrastructure, funds will be forced to suspend.
“This isn’t necessarily a bad thing, the rule would make it fairer for investors in those funds and would stop the ‘first mover advantage’, where the first tranche of investors can cash out while those who redeem after them are stuck in the fund. It will also make the ‘fair value adjustment’ or ‘market value adjustments’ we saw from property funds after the referendum vote become a thing of the past – as the funds would just suspend trading in these circumstances.
“The fact that multi-asset funds will have to suspend trading if 20% of their assets are in suspended funds has two potential consequences. First, it could lead a number of multi-asset funds to restrict the amount they hold in illiquid assets, such as property and infrastructure, so they avoid hitting this 20% rule. This will boost the liquidity of these funds but means that investors may end up with a less diversified portfolio.
“Another consequence is that multi-asset funds could move more into closed-ended funds, such as investment trusts, to get their property and infrastructure exposure. This is arguably good for the market, as illiquid assets are better held within funds that don’t offer daily liquidity, but these funds can of course trade at significant discounts (or premiums) to net asset value.”