Watchdog unveils plans for fund ‘side pockets’ to shield investors
The UK’s top financial watchdog has revealed plans for the use of so-called fund ‘side pockets’ today to ring fence assets that have become untradeable in the wake of Russia’s invasion of Ukraine.
The war has left scores of fund managers unable to shift Russia-exposed assets off their books after willing buyers dried up and sanctions were slapped on Russian firms.
But under plans announced by the Financial Conduct Authority today, authorised fund managers will be able to separate affected assets in side-pockets to shield retail investors from some of the worst fallout of the invasion.
“Side pockets would give AFMs the option to separate affected investments from the fund’s other investments,” the FCA said.
“The fund’s existing classes of units would no longer reflect the value of affected investments, but the value of units in a new unit class would be determined only by reference to the affected investments.”
The watchdog has drawn up the plans to allow new investors to enter funds without risking exposure to Russian and Belarussian assets, as well as allowing existing investors to sell the units which relate to assets that are not affected investments themselves.
“We want new investors to have confidence that they can invest into the funds without gaining exposure to Russian and Belarusian assets,” the FCA said.
Some funds that have been frozen due to their exposures to Russian and Belarussian assets will also be able to resume dealing under the plans.
The industry will now be able to have their say on the plans in a consultation until 16th May.
Ministers have backed firms severing financial ties with Russia but market conditions and trading restrictions have slowed the speed with which managers are able to fully unwind their positions.
The plans will allow investment managers to cut their holdings in Russia and Belarus and protect investors in the process, the FCA said.
Fund managers in the UK have rushed to dump Russian and Belarussian assets following the invasion, with industry heavyweights like Abrdn, Aviva and Royal London announcing they would halt investments into Russian securities and sell their existing positions when viable.
Investors have been forced to weather huge mark downs in their exposed assets following the invasion. A Royal London spokesperson told City PM the total value of its holdings had fallen to around £80m after the invasion – less than 0.1 per cent of the firm’s total assets.
Industry body the Investment Association said today the plans proposals from the FCA could offer a solution to the stasis but called for further action to prevent situation arising in future.
“Side pockets potentially offer a solution for funds with significant holdings in Russian and Belarussian assets that cannot be traded due to the crisis in Ukraine, including funds which have had to suspend,” said Jonathan Lipkin, Director of Policy, Strategy and Research, the Investment Association.
“While the immediate focus is on providing a solution for funds affected by the current crisis, we would welcome further dialogue on how we ensure that we have the appropriate liquidity management tools in place to enable us to address future events.”