Investors will need to re-evaluate the liquidity mutual funds can provide, FitchRatings has warned, following a $62bn (€54.7bn) hit in redemption suspensions from January to May as a result of the recent market turbulence.
While the amount represents a 10-year high, however, the ratings giant noted in its report, Global Mutual Fund Redemption Suspensions Highlight Liquidity Mismatches, it makes up only 0.11% of total global fund industry assets valued at $55trn at the end of 2019 (see graph below).
“This suggests that the extraordinary liquidity-management tools available to funds worked effectively when the funds were more materially affected by market events, although subsequent central bank support facilities also had a meaningful part in restoring price stability,” Fitch said.
The wave of European fund redemption suspensions in March 2020 was primarily valuation-driven, the report found. In March 2020, 109 European funds with around $53bn in combined assets suspended redemptions. By the end of May 2020, however, around $29bn (three-quarters by number of funds) of the European funds that had suspended redemptions had re-opened or liquidated.
By combining fund liquidity risk-management techniques with extraordinary liquidity-management tools, many mutual funds were able to maintain daily liquidity during market stress in March 2020, Fitch observed.
Liquidity tools key
The ratings agency went on to suggest that funds suspending redemptions “were not material outliers in their categories” when comparing them with others in terms of performance and holdings.
“This suggests that differences in the fund valuation and governance processes in given funds can influence the incidence of redemption suspension,” it added.
“The recent episode of fund redemption suspensions in Europe indicates how material differences in pricing approaches can affect end investors. How the fund is valued may mean some investors can still obtain liquidity, whereas others cannot,” the report concluded.
Most of the funds that suspended redemptions in Europe in March 2020 were domiciled in Luxembourg, or were managed by British, Danish and Swedish investment managers (see graphs below).
In particular, the report points to Luxembourg-domiciled funds managed by Danish and Swedish investment managers who suspended redemptions.
“While these funds may have had idiosyncratic features associated with the respective strategies, which forced the suspension of redemptions, it is also true that other funds, also domiciled in Luxembourg, but invested in substantially the same asset classes (with investment managers from countries other than Denmark and Sweden), did not suspend redemptions,” it noted.
Fitch suggested it was therefore likely that international and regional oversight bodies would review differences in the availability and application of liquidity-management tools from the perspective of treating investors fairly.
Regulators have identified property, high-yield bond and emerging market debt funds as most vulnerable to liquidity risk.
Fitch also revised its US and European money market fund outlook to negative in March 2020 due to liquidity issues and suggested a regulatory review of the sector was likely.
But European low-volatility net asset value money market fund flows have stabilised since March 2020 for all currencies, it said recently.
In future periods of market stress, Fitch said it believed more extraordinary liquidity-management tools would be applied – particularly for asset classes with more acute liquidity mismatches without central bank support.
The report also said that while European central banks did not support liquidity targeted specifically at mutual funds, these funds have benefitted from the intervention of global central banks.