The Association of Investment Companies has urged the FCA to spell out the risks of investing in illiquid asset classes through open-ended funds, arguing investment trusts and companies offer a better alternative on performance ground alone.
The AIC feedback comes as part of its response to the FCA discussion paper ‘Illiquid Assets and Open-Ended Funds’, which was launched in February and covers asset classes such as property, infrastructure and unlisted securities.
The investment trade body has also argued that fund providers should be required to explain why the chosen fund structure is appropriate for its underlying assets.
AIC chief executive Ian Sayers says the superior performance of close-ended funds when investing in illiquid assets is demonstrated by the “substantial outperformance” of the Property Direct – UK sector in comparison to equivalent open-ended funds.
Over five years the average Property Direct – UK investment company is up 105 per cent, whereas the equivalent open-ended property company is up 32.2 per cent.
“The structural advantages of investment companies were also brought starkly into focus by the referendum vote, when most open-ended property funds had to take some form of action in the light of changing sentiment, including repricing and suspending redemptions.
“Investment companies were not immune from market pressures, of course, and we saw discounts widen in the immediate aftermath of the referendum result, though these have recovered since. However, investors were still able to trade throughout this period if they chose to, instead of having to wait for months to sell.”
Sayers points out that many open-ended property funds are still holding upwards of 25 per cent.
“This is particularly relevant for income seekers, as such balances will be earning very low returns, whereas investment companies can remain fully invested, delivering a higher yield.”
He says the suitability of close-ended funds to illiquid investments like direct property raises questions over why the open-ended sector has four times as much invested in the space.