Fund suspensions underline liquidity mismatches
Turmoil in financial markets triggered by coronavirus will drive a fundamental reappraisal of investment funds that promise investors easy access to their money after multiple suspensions of normal daily dealing activities.
Regulators across Europe have demanded that asset managers provide reams of new information about their ability to meet redemption orders after investors found the exit door unexpectedly slammed shut by mutual funds sold in the UK, Ireland, the Nordics, India and Thailand over the past 12 months.
“Coronavirus-driven market stress will force a fundamental investor reappraisal of the liquidity that mutual funds can truly provide, particularly when they are invested in less liquid asset classes,” said Alastair Sewell, a senior director at Fitch Ratings. It has identified 109 European funds that suspended redemptions in March.
The European Securities and Markets Authority, the regional regulator, said in April that up to €100bn in funds were subject to redemption halts this year. Esma has called for increased consistency across national regulators in Europe in the authorisation of liquidity-management tools, such as restrictions on fund withdrawals.
More than 300,000 investors have waited for more than a year for their final payout following the suspension of Neil Woodford’s flagship Equity Income fund in June 2019.
A swath of UK open-ended property funds have also remained closed for more than six months and the UK financial regulator has pledged to re-examine the rules covering daily dealing.
Mr Sewell said that liquidity considerations were becoming more explicit factors for investors when assessing the merits of competing funds.
About 96 per cent of the mutual funds available to retail investors in Europe provide daily dealing facilities and just 4 per cent only offer weekly or monthly liquidity, according to Fitch. The rating agency found that less than 10 per cent of Ucits bond funds offered non-daily dealing in a previous study in 2016, suggesting that the availability of less liquid products has actually shrunk over the past four years.
Some daily dealing funds already incur significant illiquidity risk because they invest in asset classes such as emerging market debt and leveraged loans where liquidity is less plentiful.
Moving away from daily dealing would present multiple practical difficulties. Most fund trading platforms would face technological challenges and additional costs if they stopped daily dealing.
Mr Sewell said investors’ strong preference for daily dealing funds and their perceived simplicity were also barriers to change.
“All else being equal, a financial advice professional is likely to recommend a daily dealing fund to an investor rather than an otherwise comparable non-daily dealing fund,” he said.