ii responds to Bank of England Financial Stability Report

Action taken to address potential liquidity mismatches when open-ended funds invest in illiquid assets.

interactive investor today responds to proposals laid down yesterday by the Bank of England and the Financial Policy Committee to help address potential liquidity mismatches when open-ended funds invest in illiquid assets. 

While an improvement on where we are today, these proposals essentially give investors a choice between a ‘lock in’ or a ‘fire sale’ – a menu which many investors could find unpalatable, especially when there are alternative options in the closed-ended sector.

Rebecca O’Keeffe, Head of Investment, interactive investor, says: “Three and a half years after this issue first came to light, we have a proposed solution that borrows heavily from the US and German model of redemption notice periods. Investors could be forgiven for thinking it has taken a long time to reinvent the wheel.

“These proposals are an improvement on where we are today in addressing the question of liquidity mismatch in open-ended funds. However, there is a huge ‘but’. These proposals essentially give investors a choice between a lock in and a fire sale – or at least that’s how it looks to us. This strikes us as a missed opportunity, given that there is a superior structure for illiquid assets already in place – and it’s called an investment trust. No lock in, and no fire sale. The share price may still come under pressure in a distressed market, and discounts will widen – but that gives a potentially attractive entry point for contrarian investors.”