Remember, this is Esma talking here. If investors are not aware of these liquidity issues, they could be taking more risk with their money than they think.
Advisers should have a better handle on this and be offering advice to investors based on this as one of the aspects of risk to consider.
This is the kind of thing clients must understand before getting into these funds, especially in the wake of the Woodford issues.
While it is clear more than 70 per cent of the fund-of-funds are open-ended, at the other end of the scale is where you see the liquidity mismatch, according to Esma.
But what may be an additional concern is that fund-of-funds have a large amount of their investors’ money in funds from the same manager, amounting to 38 per cent of all fund holdings the report outlined.
If one fund manager goes out of fashion for some reason then the fund-of-funds exposure potentially becomes an issue.
I spent many years reporting on the split capital investment trust scandal, where the ‘magic circle’ (as it was known) invested heavily in each other’s funds, resulting in inflated values that could not be sustained in a downturn.
Is this approach from fund-of-funds managers tantamount to the same thing?
I hope not, but it is not something that anyone looking at the real risk they are taking with their money can ignore.
There is an argument that to drive the car you do not necessarily need to know exactly how the engine works best.
For many investors I can understand this is the case with their fund investments.
As long as they get the job done, they probably will not be overly worried about how it happens – although they will always want to know they are getting value for money.
However, rather like the car analogy, if a crash comes I really do want to know that the airbags are working and will save me from serious harm.
So, perhaps it is time to check the airbags on these funds a bit more closely, ready for the next downturn because, inevitably, it will come.
Alison Steed is a freelance journalist
