New fund structure to address liquidity mismatch

Ryan Hughes
24 June 2019

As first reported in the Sunday Times, the Investment Association is due to announce on Wednesday a new long term asset fund structure that will limit when people can sell their investments in order to avoid the liquidity problems that have beset the Woodford Equity Income fund.

Ryan Hughes, head of active portfolios at AJ Bell, comments:

“If there is one thing the industry can learn from the suspension of the Woodford Equity Income fund it is that there is a mismatch between the daily liquidity funds currently offer customers and the actual liquidity in the underlying assets.  Whilst fund suspensions are very rare and we shouldn’t get carried away, it sounds like report due out from the Investment Association could be incredibly well timed.

“The problem is that it has become the norm for funds to offer daily trading and one of the challenges for the industry is going to be resetting customer expectations that they can sell their investments immediately. There will need to be effective education around why having a longer notice period for selling investments offers a degree of customer protection when investing in certain asset types.  People accept it for certain savings accounts in return for a higher interest rate, so it is certainly possible for investments too.

“Moving away from daily traded funds would allow fund managers to make genuine long term investments because they will have much greater visibility of when they might need to sell underlying assets to meet customer redemptions.  This has long been discussed for property funds but would suit all kinds of investments such as unquoted businesses, small cap stocks, infrastructure projects and fixed interest, especially high yield bonds.”

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