Investments 

Fund firms push back over liquidity plans

Fund firms push back over liquidity plans

Asset managers have backed the idea of improving disclosure as a way of guarding against fund liquidity issues, but the Investment Association (IA) has said its nascent ‘Managing Large Redemptions’ working group is evidence that the industry can remain self-policing.

Fund groups and trade bodies have made their case in response to a Financial Stability Board (FSB) consultation that made 14 recommendations for asset managers, nine of which sought to address potential “liquidity mismatches” between open-ended funds and their underlying assets.

While accepting fund managers had a range of tools to help manage mass outflows, the global regulator used its June consultation to call for better disclosure on how and when such tools could be used.

In response, the IA said it supported greater clarity, but added there was “no evidence [mismatches threaten] financial stability” – a key concern of the FSB.

“Our 'Managing Large Redemptions' working group continues to work with our members, along with their delegates and distributors, to prepare for the use of tools they feel are appropriate for their funds,” the IA said. 

The trade body confirmed to Investment Adviser that the group was established at the end of last year. Its consultation response added: “Our work has confirmed our view that the fund manager is best placed to manage any liquidity issues.”

“The use of all tools should be at the discretion of the manager and no mandatory use of tools should be prescribed. Second, regulators should not have the power to supplant the manager and mandate the use of a tool.”

BlackRock, the world’s largest asset manager, said it “largely agreed with” the FSB’s proposals, including the need for regulators to collect data on individual funds’ liquidity profiles.

The firm also backed a review and possible enhancement of the liquidity risks firms are obliged to disclose to investors. But it stopped short of backing a proposal for system-wide stress testing, describing this as “at best meaningless”.

BlackRock vice-chairman Barbara Novick said: “Funds should have clear and concise disclosures to investors regarding risks related to any liquidity risk mechanisms, the potential costs and risks as a result of significant redemption activity, and the potential for the suspension of redemptions.”

Tools such as redemption fees, dilution adjustments and fund gating have returned to the spotlight this summer after UK property funds such methods to stave off redemptions in the aftermath of the Brexit vote. 

FCA chief Andrew Bailey has said the regulator would “look again” at the structure of open-ended property funds, but the IA said in its response that methods for managing redemptions should not be “stigmatised” by policymakers.

Even the suggestion of greater disclosure was not wholeheartedly welcomed by the funds industry. The European Fund and Asset Management Association cautioned against “too granular” metrics [that] investors…would have trouble understanding.”

Senior IA adviser Angus Canvin said liquidity risks needed to be put in the context of other risks. “It would be foolhardy to describe risk of liquidity on the same order of the disclosure of investment risk,” he said. 

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