Funds run by Henderson Global Investors, Columbia Threadneedle Investments, M&G Investments, Standard Life Investments and Aviva Investors, have all suspended trading on the back of high redemptions requests. Other managers such as Aberdeen Asset Management, Kames Capital and Legal & General Investment Management have adjusted the value of their funds downwards.
1) Is this even allowed?
Fund managers give themselves the option of stopping investors moving in or out of a fund if they are worried they can’t meet redemptions.
While this may be “frustrating” according to Henderson, which suspended its UK commercial real estate fund on July 5, it buys the managers time to liquidate some assets and bolster their cash piles.
2) Why have they done this?
Brexit is being widely cited as the main reason. A better answer is that this type of UK property fund has a mismatch between how easy it is to buy and sell the buildings they invest in (not very) and the ease with which investors can pull their money from the funds (which they can do at any time).
This can be a problem. Say you are running a £1 billion property investment fund and receive notice that £200 million of your funds are walking out of the door. You need to sell £200 million worth of buildings quickly. But it takes time to buy and sell buildings, as any homeowner can testify.
Fund managers know this can be a problem, so they tend to keep reasonable cash buffers in the funds. But if all the retail investors flee for the exit-door at once, the cash buffers can quickly shrink. That’s when the managers have to suspend trading – after which no-one else can get their money out.
3) When will investors get their money back – and how much will they get?
It depends how fund managers go about selling their assets. According to Laith Khalaf, a senior analyst at retail funds supermarket Hargreaves Lansdown, they need to review the suspension within 28 days. Depending on the fund, investors may face a long wait. Canada Life, which runs £450 million in this sector, warned investors could be waiting for up to six months before they could get their hands on what remains of their cash.
How much they get back will depend on the fund’s unit price on the day the suspension is lifted. Investors are already facing losses. Several funds had already adjusted prices down by up to 5% before suspending trading to try and ensure investors who yanked their cash early didn’t get too high a price at the expense of those that remained. If investors sell now, they will crystallise this loss, but values could fall further.
4) What does the regulator say about it?
Andrew Bailey, deputy governor for Prudential Regulation at the Bank of England and CEO of the FCA, said the sector needed a “review” and it was in touch with all asset managers suspending funds.
Bailey pointed to “issues in design of holding illiquid assets in open-ended funds,” adding: “We need to come back and look at it from a conduct and a systemic stability point of view.”
5) If investors have not yet made redemption requests, is it too late? And can they change their minds?
It’s in the small print.
Of the largest funds that have already suspended trading, each has a different option for investors wanting to trade out. Some need investors to resubmit redemption requests, while others want them to sit tight and wait for the funds to re-open. Others are still accepting redemption requests.