The Financial Conduct Authority (FCA) has launched a probe into open-ended funds investing in illiquid assets following a number of property fund suspensions after Brexit.
In July last year several large asset managers, including Standard Life Investments, Aviva Investors and M&G, suspended their open ended UK property funds after investors rushed to exit the asset class in the wake of the UK’s decision to leave the European Union on 23 June.
All three funds have since resumed trading, but the FCA has today published a discussion paper seeking the opinion of industry stakeholders on the practice of investing in illiquid assets through open-ended funds and the challenges this poses to asset managers and investors.
Illiquid assets in the context of the paper may include land and buildings, infrastructure and financial assets such as unlisted securities, the FCA said.
The paper highlighted how illiquid funds can encounter difficulties if investors wish to withdraw their money at short notice in sudden market events such as the Brexit vote.
It said, for example, that it can be difficult for a manager to calculate the price of a fund every day if that fund invests in illiquid assets whose prices are calculated less frequently than every day.
“These difficulties can be exacerbated if an event in the market triggers an upsurge in redemption demand, or conditions change in the market for the underlying assets,” the FCA said. “This happened after the referendum vote on 23 June 2016 to leave the EU, when liquidity management issues arose in some UK open-ended property funds.
“So, if the market for the underlying assets is affected by sudden, severe changes in conditions, leading to price falls that are not fully reflected in fund valuations, some investors might be able to sell their holding for more than it is worth, disadvantaging the remaining investors in the fund.”
FCA executive director of supervision – investment, wholesale and specialist, Megan Butler, said the paper provided a great opportunity for all stakeholders to think carefully about the management of risk, particularly around redemptions, if investors are looking for a quick exit.
She added: “We want to engage with fund managers and the investors whose money they manage to understand what problems they think exist. Specifically, in the context of open-ended funds we want people to consider how well the current rules address those problems, and what further regulatory intervention might be needed. We look forward to industry and consumers giving us their views and opinions.”
The FCA said it will use the feedback, which it seeking until 8 May, to consider whether changes to its regulatory approach in this area are necessary.
