Outflow fears preventing fund dealing changes - Fitch
Asset managers considering ways to manage bond illiquidity risk are afraid of being the first to move away from daily dealing arrangements because of a potential commercial backlash, Fitch Ratings has said.
According to the ratings agency, 96 per cent of Ucits corporate credit funds provided daily liquidity as of September 2015, with settlement typically occurring one day after the redemption request.
This is despite the fact that Ucits rules permit as few as two redemptions per month and settlement up to 10 days after the redemption request has been received.
While Fitch saw a greater focus on liquidity management techniques across the universe of funds – such as the use of derivatives and limits on the maximum percentage ownership of a specific security – it said asset managers would be less likely to abandon daily dealing because of the likelihood this could lead to outflows for the “first mover”.
In a report, the agency noted: “The potential commercial consequences through fund outflows of being a ‘first mover’ away from daily liquidity are likely to stymie fund provider appetite for adjusting fund liquidity terms.” It added: “Additional regulatory scrutiny of liquidity risk management may instead be a driver for change.”
In September, the US Securities and Exchange Commission (SEC) voted unanimously to develop rules to help ensure funds have a plan to manage liquidity risks, including introducing a classification of asset liquidity based on the number of days for a fund’s position to be converted into cash.
Other discussions have centred on a move away from daily dealing requirements, and whether a move to less frequent dealing times could help the bond market. At least one UK fund manager is understood to have mooted the idea.
The concept, however, divided fund buyers at the time. Ryan Hughes, multi-manager at Apollo Multi Asset Management, said the bi-weekly dealing offered by high-yield funds run by specialist Muzinich “worked better” in some cases. He also said he would have to limit exposure to funds eschewing daily dealing.
Jason Hollands, managing director for Tilney Bestinvest, acknowledged fears among asset managers, saying: “I very much doubt any asset manager would want to be the first to put their head over that parapet, as such a move would be very unpopular with investors, even though it would lower systemic risks and ultimately protect investors’ interests.”
However, Fitch warned it was “unclear whether asset managers’ greater focus on liquidity management techniques would be enough to match redemption demands in the event of severe market stress”. It said declining liquidity in fixed income markets meant central banks, rather than investment banks and broker dealers, are now chief providers of a liquidity buffer.
At the ratings agency’s European credit conference last month, more than 80 per cent of delegates named liquidity risk as a systemic issue requiring an industry-wide solution.
