New Long-Term Funds Could End Liquidity Concerns

Could a new type of fund that limits how often investors can withdraw their money stop a fund suspension happening again?

Holly Black 24 June, 2019 | 1:23PM

Green traffic light

The Investment Association is to launch a new type of fund, in light of the suspension of the Woodford Equity Income fund and issues that have been raised around liquidity.

The trade body for the fund industry is set to reveal details of a “long-term asset fund” later this week, according to the Sunday Times.

The new type of fund will aim to address the issue of liquidity when managers invest in unquoted companies or other illiquid assets which can be difficult to buy and sell.

Currently open-ended funds are allowed to have up to 10% of their assets in unquoted stocks, but there can still be liquidity issues if there is a flood of investor redemptions.

A long-term asset fund would encourage investors to take a longer-term view. It is understood that the funds would limit how frequently people would be able to withdraw their money to once a month or once a quarter, for example.

Rob Morgan, investment analyst at Charles Stanley, said: “It’s an interesting idea and is good in the sense that it makes clear to investors that there is a trade-off between the liquidity of an underlying investment and the accessibility of your money.”

Will Funds Attract Retail Investors?

While he points out that such vehicles are already used in institutional investing and are also fairly commonplace within savings accounts, he is unsure whether retail investors will be attracted to such products.

“I suspect funds of this type would struggle to gain traction,” Morgan adds, “Investment trusts would continue to be the natural home for these assets in my view as even limiting dealing doesn’t entirely eliminate the liquidity issue.”

Other experts are more sceptical. Gina Miller, founder of the True and Fair Campaign, says this is an example of the Investment Association "attempting to close the door after the horse has bolted and over-reacting rather than being prudent". 

"Monthly or quarterly redemption dates will not address the underlying illiquidity issue for funds such as Woodford Equity Income," she adds. Instead, she thinks the FCA should bans all funds with daily or weekly dealing from investing any further money into unquoted investments or illiquid assets such as property. 

The suspension of the Woodford Equity Income fund has raised questions over whether it is appropriate for open-ended funds to invest in illiquid assets and unquoted companies. Morningstar analyst David Holder says a key problem is the so-called liquidity mismatch: investors in a fund can buy and sell every day but it could take the manager weeks or months to sell the illiquid assets to meet redemption requests. 

Ryan Hughes, head of active portfolios at AJ Bell, says: "One of the challenges will 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 fo selling investments offers a degree of customers protection when investing in certain asset types."

He says this type of fund could suit a number of different assets including property, infrastructure, small-cap stocks and high-yield bond, all of which can take more time to buy and sell than other investments. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites