What is a listed fund?
Broadly speaking, an investment fund refers to any vehicle (usually a corporate vehicle in the case of listed fund) which allows investors to pool their money together for investment by an investment manager in accordance with a defined investment policy. A listed fund is an investment fund which has been admitted to trading and/or listing on a stock exchange – being a platform were securities can be bought and sold. The term "listed" is often used interchangeably with "traded" but there are important distinctions between the two (see further below).
If you have a personal pension, there is a very good chance that some of it will be invested (albeit indirectly) in a listed fund.
The shares in listed funds are publicly traded securities which are transferable at the option of the shareholder (subject, of course, to finding a willing buyer), whereas an investment in a private fund will likely only be permitted to be transferred by an investor with the consent of the manager of the fund.
Why establish a listed fund?
There are lots of reasons to establish a fund – here are just a few:
- Tax-efficient – funds are structured to be tax-efficient, meaning that investors (after the fees of the investment manager and other service providers etc.) insofar as is possible are treated as if they had invested in the fund's assets directly;
- Permanent capital vehicle – a listed fund will often have no fixed life and there will be no ability for shareholders to redeem or withdraw their investment from the fund. Shareholders exit their investment by selling their shares on the relevant stock exchange. This means that the invested capital in the fund cannot be reduced by shareholders withdrawing their investment.
- Exposure to assets not otherwise available to single investor / spread of investment risk – one of the benefits of pooling investment with other investors in a fund is that an investor can gain exposure to assets which may otherwise be unavailable to a single investor. For example, a fund which invests in renewable energy projects. In addition, certain funds will be required to make a minimum number of investments to spread investment risk (or, in other words, the fund won't put all its eggs in one basket).
- Regulated entity – the fund will be subject to regulation in its place of domicile (for example, Guernsey or Jersey) and by virtue of its listing – for example, funds listed on the Main Market of the London Stock Exchange will be subject to the UK Listing Rules and funds listed on The International Stock Exchange (TISE, formerly the Channel Islands Stock Exchange) in the Channel Islands will be subject to the TISE Listing Rules. These rules (and others) will seek to protect investors by requiring the timely disclosure of information and monitoring of investment risk.
- Liquidity – as noted above, shares in a listed fund are publicly traded, so as long as a seller can agree on a price with a buyer, they will be able to sell their shares.
What can a listed fund invest in?
Broadly speaking any asset can be "wrapped" in a listed fund wrapper. For example, a listed fund may make investments in other investment funds, shares, loans, infrastructure, property, student accommodation, planes, ships, wind farms, solar energy, intellectual property… the list goes on!
Who manages a listed fund?
A listed fund will either appoint an external investment manager or will be self-managed, meaning that the board of directors of the fund will make investment decisions for the fund (albeit usually on the advice of an external investment adviser). Whether the fund is managed by an external manager or is self-managed, investments will be made in accordance with the fund's stated investment policy.
In addition to the manager, a listed fund will also have a board of directors, the majority of whom will be independent of the manager. The board will ensure compliance with applicable corporate governance requirements and will monitor the service provided by the manager and other relevant service providers such as an administrator, registrar and custodian.
Where to list
The market on which a fund is listed will be dependent on the fund's ability to meet any listing restrictions applicable to the relevant market. For example, listing on the Main Market of the London Stock Exchange will mean that the fund's investment policy will require the fund to have a sufficient spread of investment risk. Other markets, such as the Specialist Fund Segment of the London Stock Exchange (the SFS) and TISE, will be more permissive in terms of a fund's investment policy – for example, funds investing in a single aircraft have been admitted to trading on the SFS.
Where a fund is listed can also have tax implications for an investor. For example, UK resident taxpayers may be concerned about the eligibility of their listed fund shares for inclusion in an ISA or a SIPP – it's important to note that not all stock exchanges will qualify. Those which will qualify include, but are not limited to, the Official List of the UK Listing Authority (i.e. the Main Market of the London Stock Exchange) and TISE. Admission to trading on the SFS will not alone be sufficient for ISA/SIPP-eligibility.
It is possible to list a fund on two (or more) markets (known as a dual-listing) – for example an admission to trading on the SFS has been paired with a listing on TISE. Therefore gaining greater market visibility and ISA/SIPP eligibility for certain investors.
Marketing a listed fund
Marketing (or selling) any investment fund (whether listed or not) will likely be subject to restrictions on either the manager or the fund, taking into account where the fund has been established, where the manager is located and where the potential investors are located. The rules relating to marketing a fund can often be complex, so specialist advice would always be recommended.
How long does it take to launch a listed fund?
There are a number of factors which contribute towards the timetable for launching a listed fund – however, 10-12 weeks is usually is usually sufficient time.
This article first appeared in Contact magazine.