Open-ended funds are not always the right answer
I am glad JP Morgan has chosen to launch its emerging markets income fund as an investment trust. I have always believed open-ended funds should only invest in highly liquid assets and that a key part of their proposition is investors’ ability to sell on any business day.
For that reason, I have always been sceptical of life property funds, with their murky potential lock-in clauses. Even a parent with a big bank balance does not help because, in dire conditions, the problem is not liquidity but valuation - nobody has a clue what the right price is.
The only answer that does not potentially disadvantage ongoing investors is to let the market make a price, which is what happens with closed-end funds.
I have now seen four bear markets in which the prices of closed-end private equity or venture capital trusts fell to 50 per cent or less of their netasset values. In theory, that is, since in bear markets nobody really knows what the NAV of a private equity fund is.
That is why I was so astonished at the Arch Cru debacle - I simply could not believe the FSA had authorised a fund which openly advertised itself as investing in private equity, yet was characterised as “cautious”.
Thousands of investors have suffered serious losses and the fund management industry’s reputation has taken a dent.
Sadly, it seems to me the FSA just does not get it, since its funds of alternative investment funds rules, it seems to me, are open to the same problems.
Open-ended funds are permitted to invest in funds that may themselves invest in illiquid assets.
As we saw in 2008, if things get really tough, hedge funds suspend redemptions, so it is predictable that some Faifs will also end up doing so.
I do not buy the idea that we have to allow hedge funds onshore and nor should the FSA have allowed itself to be conned into this.
A tiny minority of investors will ever invest in Faifs, yet we have a whole splodge of rules that the FSA itself will not know how to police and the possibility of the reputation of the UK fund management industry being tarnished.
And look at what is actually happening - UK fund managers are launching UK-authorised hedge fund-lite Ucits III funds which are better than hedge funds in that a: they do not gear up and b: they have lower fees. Easy-come Luxemburg is the right place for the hedgies - let’s keep London clean and try and salvage our reputation for safe fund management.
It would be nice if a few chief executives at fund management groups could see that their interests are best served by an industry that people trust, not one that allows them to loot and pillage, and better still if they had the gumption to tell the FSA.
If I buy illiquid assets, I want to buy them in a form that I know gives ongoing investors a fair shake but requires would-be sellers to rely on the market for an exit. I find it quite satisfying that it is an investment vehicle we invented over 150 years ago - the investment trust - that is still the best way of doing this.
Chris Gilchrist is director of Churchill Investments and editor of The IRS Report