Last week the US Securities and Exchange Commission (SEC) voted unanimously to develop rules to help ensure funds have a plan to manage liquidity risks.
Gavin Haynes, managing director at Whitechurch Securities, said he thought UK regulators should consider taking similar action.
In recent years policymakers have become increasingly worried about the potential implications of a reversal in bond fund flows, particularly given the gradual decline in the number of investment banks able to provide liquidity to the market.
Mr Haynes said: “I think increasing disclosure regarding liquidity of bond portfolios would be useful. In particular, the proposal of the SEC for funds to classify assets into liquidity buckets based on how long it would take to convert [the assets] to cash is an interesting practice.”
The SEC’s six “buckets” relate to how long it would take to convert an asset to cash without materially moving its price.
Jason Hollands, managing director at Tilney Bestinvest, said: “Regulators are absolutely right to consider what might happen in the event of a large-scale exit from bond markets – for example, ahead of a US rate-hiking cycle.”
But Jim Wood-Smith said the plans are likely to prove fruitless. The head of research at Hawksmoor Investment Management said: “It is like a tsunami defence: you can make all the best plans, but if it is the big one, then they are going to get washed away anyway. So what they are doing is all sensible stuff, but ultimately it is likely to fail.”
One alternative measure, which Investment Adviser understands has begun to be discussed openly by some bond managers, is a move away from daily dealing requirements.
The manager of a UK-domiciled high-yield bond fund, speaking at a conference in London last week, is understood to have suggested that a move to less frequent dealing times would help the sector.
These changes, however, would not sit easily with the requirements of the retail fund management industry.
Ryan Hughes, multi-manager at Apollo Multi Asset Management, said the biweekly dealing offered by high-yield funds run by specialist house Muzinich “worked better” on some occasions. But he admitted the implementation of such standards would prove problematic.
“I’d have to limit my exposure to these funds as it would throw up difficulties for me. These funds would also have difficulties with platforms, [because] if they were not daily dealing [the platforms] would have structural issues in selling them,” he said.
Mr Hollands agreed that a suspension of daily dealing may be the right thing to do in the event of a liquidity crunch, but he was unsure who would be willing to make the first move.
“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,” he said.
But Mr Haynes said he “totally disagreed” with changing the practice of daily dealing.
“I think it is imperative that bond funds should have daily dealing,” he said. “Removal of this would significantly reduce their appeal and cause significant concerns for investors regarding accessing their money in the asset class.”
These comments follow the conclusion of a six-month study into redemptions by the Bank of England’s Financial Policy Committee last week. It revealed that the current system “reduces incentives for [fund] investors to redeem if they suspect others will do the same”.
But the committee added that further work is necessary “on the potential impact of correlated investment behaviour by investment funds and of the measures those funds could deploy under stress”. It will report on these findings in December.
SEC’s liquidity proposals
The rules voted for by the SEC last week will require US mutual funds and exchange-traded funds to have a four-point “liquidity risk management programme”, involving:
■ A classification of asset liquidity, divided into six categories, based on the number of days for a fund’s position to be converted into cash;
■ An assessment, regular review, and management of a fund’s liquidity risk;
■ The creation of a three-day liquid asset minimum, detailing what proportion of a fund could be liquidated in this time frame – without unduly affecting prices;
■ Board approval and review of the programme, conducted by a fund’s independent directors.
