Don’t curtail access to less liquid asset classes, investors – and the economy - need it

Daily Telegraph - June 2019
The work of investment managers has been featured prominently in the news in recent days and triggered a welcome discussion on how we invest the savings of the millions of people who look to us to provide a better standard of living in retirement for them. That is a responsibility that my industry takes incredibly seriously, not just because of the value of the money we manage but also because of the wider role we have in powering our economy.

A founding principle for the funds industry was to democratise finance, gathering together the savings of customers across the country, and pooling them to harness their collective value. By investing carefully in listed companies, new startups, creating new infrastructure, and financing technological developments, we are able to fuel the economy, and the fruits of these investments are the pensions paid out every day.

Delivering long-term returns relies upon being able to build portfolios with a mix of different assets, catering for the needs, timescales and investment levels of our customers. Some choose funds that have a very specific focus, such as investing solely in UK listed companies, while others want a broader approach.  Portfolios can include investment in less liquid assets, such as directly held property and infrastructure, or unlisted shares issued by companies.

While UK and European regulation allows illiquid assets in open-ended as well as closed-ended funds, we are keen that the investing public understands fully the advantages, and disadvantages, of the investment options they have.

I strongly believe it is wrong to set this up as a contest between open-ended and closed-ended funds. Both play an important and valuable role.  Open ended funds can be an effective way for retail savers to access more illiquid asset classes, recognizing that they may not be as easy to buy or sell as shares in the FTSE 100 or other very liquid stock markets.  Simply closing off access to one type of asset class reduces choices, ultimately restricting the benefits from wider sources of return.

Closed-ended funds in turn have their benefits, but they are not for all investors, and as an industry we have to offer a wide range of products to suit the needs of the investors, especially those who may look for a more-direct connection between the value of their fund holdings and the value of the underlying assets.

The debate should instead be focused on how to accommodate the changing needs of millions of UK savers who now rely on the industry given the changes to pension legislation and the popularity of ISA investing.  A key foundation has to be communication, so that funds clearly set out what they are aiming to achieve, as well as the risks taken as part of the process.  The IA has been working with the FCA and the FCA Consumer Panel on better fund communication and this work will continue apace to help our customers get an even clearer perspective on their investment choices.

As an industry we should also be able to protect the interests of all investors, not just the ones who want to exit. The FCA themselves could not have been more clear that suspension, when done to protect the interests of savers, is an important part of the financial system, and one replicated all over the word. While there were lessons to learn from 2016 when a number of property funds had to suspend following the Brexit referendum, suspension broadly worked as designed. We will continue to work with the regulator to look at how we can strengthen this tool further.

It is crucial that the industry can deliver effectively and efficiently to customers in a broader economic environment where public share markets remain turbulent, interest rates low and sources of potential return widening. In that landscape, the so-called ‘illiquidity premium’, can help to give customers better returns.

But this does raise the question of how valuable daily liquidity is for long term investors, particularly pension schemes, and how investment funds could better provide access to the less liquid assets.  The Investment Association has been doing a lot of work on this issue in the context of changing customer needs and Government initiatives such as the Patient Capital Review.  While daily liquidity is an important feature of the funds market, customers should also have the opportunity to access something different and distinct.

Our industry has built its world leading position because of continuing innovation, built on the ideal that ordinary people can have a share of long term wealth creating opportunities. It is a timely reminder that we manage more than people’s money but also their hopes for the future too and we need to earn their trust.
Front cover image of liquidity brief

Liquidity in fund management

A guide from the IA
July 2019
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