Calm prevails, or are we simply in the eye of the storm? Either way, after the currency, equity and property market ruptures of the past few weeks, it’s time for a little reflection.
Given funds’ central role in the property panic, it’s this dislocation that will have the most serious implication for the retail investment industry.
There’s already been plenty of talk about how best to resolve these funds’ liquidity mismatches, just as there was in 2008, when multiple suspensions last occurred. But I wonder if the consequences may be more seriously felt somewhere other than real estate portfolios.
New Financial Conduct Authority chief Andrew Bailey has already said he will look again at property funds. The horse may have already bolted on that one, but I’d note that when regulators have previously expressed concern over liquidity mismatches, it wasn’t property that was foremost in their minds.
So I imagine this latest saga will make watchdogs more cautious on long-standing issues like bond market liquidity.
The FCA’s acknowledgement it will need to reconsider property funds looks like an admission it has been behind the curveHigh-yield debt has been one of the most notable areas of concern, and the high-profile gating of the Third Avenue credit fund in the US last December will not have improved regulators’ feelings towards the asset class.
The Bank of England has also been keeping tabs on other fixed income sectors via closer dialogue with fund groups as well as more concrete measures. Its Financial Policy Committee’s decision to stress test bond funds last summer is a case in point.
Readers may correctly point out that offering daily liquidity fixed income funds, however esoteric, is a very different prospect from doing so for real estate portfolios.
They may even present the Third Avenue episode – and, in time, perhaps even this month’s events – as evidence that wider markets can withstand the potential downside of a fund gating.
But the FCA’s acknowledgement it will need to reconsider property funds looks like an admission it has been behind the curve. That to me makes pre-emptive action on fixed income marginally more likely – if only for appearance’s sake.
As I discussed last week, there are a number of structural issues that will make any shift away from daily dealing hugely difficult for the industry to overcome. All the more so should fixed income funds face this.
Nonetheless, when we look back on this episode, it may prove to be telling that the example of poor practice provided by BoE governor Mark Carney last week, when questioned by the Treasury Select Committee, wasn’t property funds at all – it was emerging market debt.
Dan Jones is editor of Investment Adviser
