The Financial Services Authority (FSA) is holding discussions with asset managers over more effective ways to allow groups to close open-ended funds to new investors.
IFAonline's sister title Investment Week understands the regulator is considering being more flexible around the rules which govern the closure of OEICs and unit trusts, to help providers shut funds quickly and protect existing investors.
Currently, closing a popular fund when it becomes too large is fraught with difficulties as the structure of OEICs and unit trusts means new shares and units must be created by the provider to satisfy demand.
When launching funds, groups are also limited in what they can include in a prospectus regarding a potential closure.
Unlike other jurisdictions, such as Ireland, a group running funds domiciled in the UK cannot put a general clause in the prospectus which allows it to shut a fund to new business when it chooses.
Only in exceptional circumstances – and with the FSA’s permission – can a provider close a fund.
This means groups are left with a limited number of options to block inflows, including placing a large initial charge on a popular product or ceasing marketing activities.
Options the FSA is considering, in order to facilitate the quick closure of a fund, include allowing prospectuses to feature a clause permitting immediate closure or closure at short notice.
Another route would be to allow fund groups to limit the number of units or shares created for a fund, which would make them similar to investment trusts.
Funds already have this ability, but the limit has to be published in a prospectus at launch; something which very few funds have ever done.
One option would be to allow existing funds to amend their prospectuses and put a cap on the number of units or shares they will offer.
The fund capacity issue was in the spotlight once again earlier this month when Aberdeen Asset Management moved to stem flows into its hugely popular emerging markets range, headed by Devan Kaloo.
The manager and his team are now running over £16bn across the Aberdeen Emerging Markets, Global Emerging Markets Equity, and Global Emerging Markets Smaller Companies funds.
To enable the team to remain flexible and choose the companies they want to own, rather than be forced to hold larger stocks for liquidity purposes, the company has put a 2% initial charge on the portfolios.
Aberdeen told clients in a letter the idea of simply closing the funds outright had caused issues with the regulator.
It said: “We considered closing the funds, but either ran into regulatory difficulties in implementing this, or concluded that there might be a more long-term effect on the product range.”
However, as other fund houses have found, a small front-end charge is unlikely to deter investors.
Troy Asset Management’s Trojan fund, run by Sebastian Lyon, has failed to deter buyers by increasing fees on the product and hiking the minimum investment.
The group opted to close the fund in 2011 when it was under £1bn in size, raising the minimum investment to £250,000 and introducing a 5% initial charge. However, the fund has since grown to £2.4bn in size.
An industry source said the problem is coming to a head following the recent surge of inflows into equities.
“It is a growing challenge for open-ended funds, and an elegant solution is needed to solve it,” they added.
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