The Investment Association (IA) has announced its intention to develop a long-term asset fund, as part of a wider plan for the future success of the investment management industry.

In the report titled ‘2025 Vision’, the IA outlines three key areas of development: greater clarity of approach in the area of sustainable investment, more consistent definitions, labelling and disclosure; a dynamic and responsive UK investment fund regime, which includes creating a long-term asset fund – a new fund which will enable investment in a wider range of assets and finally the greater adoption of technology to drive innovation, improve operational efficiency, pass on lower costs to customers and protect against increasingly complex and borderless cyber threats.

Commenting on the proposed long-term asset fund, Chris Cummings, chief executive of the Investment Association, said: “The IA’s proposals to help develop a new long-term asset fund will respond to changing customer needs and support the financing of companies and public projects.

“With the UK set to leave the EU over the next few months, these proposals will also help future proof the UK’s investment landscape, ensuring it can remain competitive on a global scale and allowing international investors to benefits from innovation in our country’s fund regime.”

In theory, the IA’s proposals for a long-term asset fund could work, but industry members are sceptical.

Going further

Whilst the Association of Investment Companies (AIC) agrees that investment in illiquid assets offers many benefits to investors, the AIC believes that the proposals do not address the fundamental issues raised by the recent suspension of Woodford Equity Income Fund.

Ian Sayers, chief executive of the AIC said: “The ability to sell your shares or units at a time of your choosing has been the linchpin of fund regulation for decades.  This is achieved in an open-ended fund by the manager selling assets to meet redemptions and in a closed-ended fund by investors selling their shares on the stock market. This principle should not be abandoned without careful consideration of the implications for ordinary investors. As recent events have shown, a fund does not have to hold a significant amount of illiquid assets to run into trouble.

“Looking at the FCA’s recent proposals for open-ended funds investing in illiquid assets, we appear to be heading towards a world with less frequent redemption opportunities for investors, more frequent suspensions and the likelihood that open-ended managers will hold ever greater amounts of cash, reducing investment returns.

“At the same time, this approach will not resolve the systemic problems that Mark Carney recently identified where he raised the prospect of funds which invest in illiquid assets experiencing the equivalent of a run on the banks. It is a pity that these threats to consumers and financial stability were not explored at yesterday’s Select Committee hearing with Andrew Bailey.”

Interactive investor, is also supportive of the IA’s intentions behind the fund, however, they believe “the proposed new hybrid does not appear to improve upon existing structures already in place, for example in the closed ended sector.”

Rebecca O’Keeffe, head of investment at interactive investor says: “Whilst we welcome what the Investment Association is aiming to do in proposing a new structure that could be supportive of less liquid assets such as private companies and infrastructure, we question why it should come with strings attached.

“If open-ended funds want the right to invest in illiquid assets without the accompanying obligation to offer daily access to their own investors, as an advocate for our customers we wonder what exactly is being offered that might entice eligible investors to sacrifice liquidity when buying into these funds?

“Given that the proposed long-term asset funds are able to limit withdrawals to brief windows that open every month/quarter, investors will reasonably ask ‘What do I get in exchange for this lack of liquidity?’

“We recognise that the current proposals are still in their infancy and may deal with these issues over the coming months. We would also welcome the opportunity to be part of the conversation.”