“While sentiment towards property changed and property investment companies’ share prices suffered, investors could still sell their shares if they wanted to and investors were able to buy them.”
In response, the FCA launched a discussion about “some of the risks created when consumers use open-ended funds to gain exposure to assets that may be difficult for the fund manager to buy, sell or value quickly”.
It published its findings in July this year, telling fund managers to improve practices, and criticising firms for “inadequate” planning.
Ahead of the publication of those findings, the AIC called for clearer disclosure of the risks to investors of open-ended funds which invest in illiquid assets.
Ian Sayers, chief executive of the AIC, said in a release in May: “The arguments in favour of using the closed-ended structure for illiquid assets are so strong that you have to question why the open-ended sector’s assets in UK Direct Property are four times bigger than the investment company sector.
“So we are calling for clearer disclosure of the risks associated with a mismatch between the liquidity of the fund and its underlying assets, as well as asking fund promoters to justify their reasons for the fund structure chosen, and not simply to default to the open-ended option.”
Weighing the differences
Advisers are often more familiar with the open-ended fund structure than with investment trusts but for many, the issues after the referendum highlighted the differences.
Ultimately though, it is at the adviser and their client’s discretion.
Mike Pinggera, manager of the Multi-Strategy fund at Sanlam Four, points out: “As with many investments it is simply a matter of preference.
"Permanent capital vehicles, such as listed infrastructure or Reits, do not have to sell underlying assets when investors sell their holding because the liquidity is provided by the stockmarket.
“However, these vehicles can trade at discounts and more recently at premiums to NAV. Open-ended vehicles trade at NAV, but can be forced to suspend redemptions if too many investors want out at the same time.”
He adds: “There is no right answer but generally it is good to avoid a liquidity mismatch.”
eleanor.duncan@ft.com
