What is a listed fund?
Broadly speaking, an 'investment fund' refers to any vehicle (usually a corporate vehicle in the case of a listed fund) which allows investors to pool their money 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 – a platform where securities can be bought and sold. The term 'listed' is often used interchangeably with 'traded', but there are important distinctions between the two.
Personal pensions are often invested – albeit indirectly – in listed funds.
The shares in listed funds are publicly traded securities which are transferable at the option of the shareholder (subject to finding a buyer), whereas an investment in a private fund can probably be transferred by an investor only with the fund manager's consent.
Why establish a listed fund?
There are many reasons to establish a fund, including the following:
- Tax-efficient – funds are structured to be tax efficient, meaning that investors (after the fees of the investment manager and other service providers) 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 investors and spread of investment risk – one of the benefits of pooling investment in a fund is that an investor can gain exposure to assets which may otherwise be unavailable to a single investor (eg, a fund which invests in renewable energy projects). In addition, certain funds will be required to make a minimum number of investments in order to spread investment risk.
- Regulated entity – the fund will be subject to regulation in its place of domicile (eg, 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 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, it can sell its 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, aeroplanes, ships, wind farms, solar energy, intellectual property and many others.
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 makes investment decisions for the fund (albeit usually on the advice of an external investment adviser). Regardless of whether the fund is managed externally 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 have a board of directors, most of whom are 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 administrators, registrars and custodians.
Where to list
The market on which a fund is listed will depend 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 (SFS) of the London Stock Exchange and TISE, are 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 individual savings account (ISA) or a self-invested personal pension (SIPP) – not all stock exchanges will qualify. Those that qualify include the Official List of the UK Listing Authority (ie, the Main Market of the London Stock Exchange) and TISE. Admission to trading on the SFS will not alone be sufficient for ISA or SIPP eligibility.
It is possible to list a fund on two (or more) markets in what is known as a dual listing; for example, an admission to trading on the SFS has been paired with a listing on TISE, thereby gaining greater market visibility and ISA or SIPP eligibility for certain investors.
Marketing a listed fund
Marketing or selling any investment fund, whether listed or not, is likely to 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 are often complex, so specialist advice is always recommended.
How long does it take to launch a listed fund?
The timetable for launching a listed fund depends on a number of factors – however, 10 to 12 weeks is usually sufficient.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.