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Busting investment trust myths

Busting investment trust myths
May 11, 2021
Busting investment trust myths

It’s nearly half a decade since the Brexit vote triggered a wave of trading suspensions on open ended property funds. Nearly half a decade since the so-called “liquidity mismatch”, in funds whose units can be sold in a matter of days but which themselves hold assets that can take months to sell, became so grossly apparent. And yet we still lack any clear solution: having finished consulting on the idea of a notice period of 90 to 180 days on withdrawals from such funds, the FCA has said it will not announce whether it goes ahead with the proposal until summer at the earliest.

In fairness to the regulator, the protracted nature of its work partly illustrates the sheer difficulty of tackling the liquidity mismatch. It also highlights the appeal of investment trusts when it comes to holding illiquid assets. But it’s important to remember that closed ended funds are not a perfect solution, as some like to suggest. A number of investment trust myths, positive and negative, need busting.

When it comes to illiquid assets, it’s true that trusts have a permanent base of capital. The investment manager has no need to deal with the flows of money in and out of a fund, and no reason to conduct a fire sale of assets if many investors want to exit. The weakness of open ended funds here became most obvious with the gating of both the property funds and the stricken Woodford Equity Income fund.

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