Will FCA’s plans to fix open-ended real estate funds work?

The Financial Conduct Authority’s proposals for long-term asset funds could mean that some assets are not usable in model portfolios, according to guests of the latest edition of the FTA Advisor Podcast.

In recent years, the so-called liquidity imbalance has forced real estate funds to repeatedly open and close to buybacks, first in response to Brexit and then because of the coronavirus pandemic.

To remedy this, the Financial Conduct Authority proposed a new type of fund: the long-term asset fund, which would have “liquidity tools” that could include notice periods, deferred repayments or limits on the amount. a fund that can be repaid over a specified period.

Speaking on the podcast Ryan Hughes, Head of Active Portfolios at AJ Bell, said: “If I say, on the one hand, that I provide you with daily access to my product, it falls to me as the manager of funds to make sure that within this framework, the assets that I hold and that I invest offer the same type of liquidity below.

“So what it might mean if we lower that structure is that some asset classes are not usable for model portfolio solutions and that might not be a good result. Or we just find a different structure.

“Maybe we’re using the investment trust structure that already exists, where we accept that the trade-off for liquidity is that we get a lower price. The solutions already exist in some ways, it’s just that some parts market – some platforms – may not make it easy and people think there is only one answer to that. “

Hughes said AJ Bell had zero-weight commercial assets in his Active Model Portfolio service because he was concerned about the risk of suspension even though his mathematical model said he should allocate for it.

Mike Barrett, director of advice at The Lang Cat, expressed concern that some advisers and investors now view illiquid assets as inherently bad – which he believes may have been a factor behind Aviva’s decision to liquidate its real estate fund with variable capital.

He said: “My experience as counselors through the Woodford episode […], a lot of advisers got very, very nervous about the word “liquidity” and I think it’s probably fair to say that there were a few advisers who maybe didn’t understand the problem.

“But more importantly, their clients started to worry about illiquid assets and […] the industry needs to understand that and explain what’s going on here.

“There is certainly a cohort of advisors and certainly clients who will see the words ‘illiquid assets’ and automatically think it’s a bad thing and want to walk away from it.

“I suspect that’s what happened with Aviva and some of the other real estate funds, where they’ve reopened and seen the buyouts, and these are just people who maybe are gutting things and just wanting get out of something they perceive to be riskier than it probably is. “

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