The Investment Association (IA) is set to unveil proposals for a new type of fund, which would seek to avert liquidity crises such as the one engulfing the Woodford Equity Income fund.
New rules and guidelines for so-called "long-term asset funds" have been in development by an IA working group over the past year, the details of which are set to be outlined at the trade body's conference on Wednesday, according to The Times.
The IA will publish a report detailing how the UK asset management industry will remain competitive post-Brexit, but will also seek to encourage people to invest for the long term.
As a result, its new fund proposals are set to include limits on redemptions in open-ended funds, thereby helping portfolio managers to invest in less liquid stocks over the longer term without fear of a sudden run on their fund.
Under the proposals, investors would only be able to make redemption during certain windows in the year — such as monthly or quarterly.
Chief executive of the IA Chris Cummings said: "The UK is crying out for these types of long-term investments... which will help savers and local communities up and down the country."
"With the UK set to leave the EU in the next few months, these proposals will help future-proof the UK's investment landscape, ensuring it can remain competitive on a global scale."
In a letter to David Sorensen of the Financial Conduct Authority in February, the IA said none of the three categories of authorised funds - UCITS, NURS and QIS - are "truly suitable for retail investors to gain access to gain access to private market investments".
It explained its ‘LTAF' proposal is "built on a modified NURS structure capable of being sold to professional and retail investors", adding it would have "the following key characteristics":
• Utilise existing authorised NURS structure
• More flexible investment and borrowing powers
• Flexible dealing frequency
• Option to list
• Liquidity management tools such as notice periods and limited/deferred redemptions
• Model based valuations
• Strong investor protection measures
• Avoidance of any additional tax leakage
Ryan Hughes, head of active portfolios at AJ Bell, commented:
"If there is one thing the industry can learn from the suspension of the Woodford Equity Income fund it is that there is a mismatch between the daily liquidity funds currently offer customers and the actual liquidity in the underlying assets.
"While fund suspensions are very rare and we should not get carried away, it sounds like report due out from the Investment Association could be incredibly well timed.
"The problem is that it has become the norm for funds to offer daily trading and one of the challenges for the industry is going to be resetting customer expectations that they can sell their investments immediately.
"There will need to be effective education around why having a longer notice period for selling investments offers a degree of customer protection when investing in certain asset types. People accept it for certain savings accounts in return for a higher interest rate, so it is certainly possible for investments too.
"Moving away from daily traded funds would allow fund managers to make genuine long term investments because they will have much greater visibility of when they might need to sell underlying assets to meet customer redemptions.
"This has long been discussed for property funds but would suit all kinds of investments such as unquoted businesses, small cap stocks, infrastructure projects and fixed interest, especially high yield bonds."