Open-ended funds are an important means of investment into illiquid assets, and represent an efficient way for large numbers of people, including retail investors, to get access to those assets.
Open-ended funds are an important means of investment into illiquid assets, and represent an efficient way for large numbers of people, including retail investors, to get access to those assets.
The FCA asked a number of questions about whether and how the mismatch between the frequency of the liquidity opportunities offered to investors (often daily) and the relative illiquidity of the underlying assets might be better addressed.
Professional vs. retail
One question the FCA asked is whether professional and retail investors should be distinguished? In practice, however, the differences between professional and retail investors are more theoretical than real.
Many retail investors have the benefit of expert advice prior to investing, and of course most professional investors (such as discretionary fund managers and pension funds) ultimately represent retail investors at the end of the investment chain.
This spectrum of expertise would suggest that it is not appropriate to direct “retail” and “professional” investors into different funds or share classes. Indeed, distinguishing between retail and professional investors could raise questions about fair treatment of customers.
But consumers, generally, might be better served if they had a range of liquidity options to choose from, and this might also enhance their appreciation of the impact that liquidity frequency has on portfolio composition and cash management.
Enhanced disclosure
The FCA has questioned whether fund disclosures could be enhanced. In actual fact, fund disclosures tend to be very thorough but there is a question mark over whether retail investors, at whom enhanced disclosures would principally be targeted, fully read and understand the disclosures.
However, investment in open-ended funds running illiquid strategies is largely intermediated and one would expect these retail investors to be better-informed than execution-only investors.
Nonetheless, disclosures could be more prominent and could provide more “colour” on the manager’s proposed approach to liquidity management.
For example, would the manager seek to impose longer notice periods or redemption discounts in preference to a suspension? Would they seek to run a larger cash pool in order to minimise the risk of suspension or run a smaller cash pool in order to maximise investors’ exposure to the chosen investment strategy?
Every investment decision made by a manager has an opportunity cost, and more emphasis might be placed on explaining this cost to investors with a view to increasing investor choice.
However, heavily prescribed disclosures would make this type of explanation difficult to give in sufficient detail. It would not be possible to give a clear explanation of the various liquidity options and how they might impact investment decisions within the confines of Key Information Documents (KIDs) to be imposed under the Priips regulation.
