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Global financial regulators have made a recommendation for fund managers investing in assets that are difficult to sell, such as property. The suggestion is to charge clients for withdrawing their cash in order to discourage mass withdrawals and prevent any disadvantage to clients who choose to remain in the fund.
The Financial Stability Board and International Organization of Securities Commissions have published guidelines for asset managers, following the market instability caused by the coronavirus pandemic in March 2020. The aim is to address issues related to investors selling assets in a panic and exacerbating market instability.
Property funds, in particular, have faced pressure in recent years as investors rush to withdraw their cash due to concerns about rising global interest rates and depressed commercial real estate valuations. Regulators are worried that large redemptions could force funds to sell illiquid assets at significantly reduced prices, further alarming investors.
Martin Moloney, Iosco secretary-general, has highlighted the significant portion of the funds industry with substantial illiquid assets. He mentions the timing challenge in selling property assets which can take months to complete while daily redemptions are offered to investors.
In response to these challenges, Blackstone limited withdrawals from its Real Estate Income Trust, BlackRock began returning cash to investors in its UK Property fund, and UK fund managers M&G, Schroders, and Columbia Threadneedle previously imposed limits on withdrawals from their UK real estate funds.
Regulators such as the European Central Bank have voiced concerns about declining market liquidity and price corrections, particularly in open-ended real estate funds with liquidity mismatches between assets and liabilities.
The FSB and Iosco recommend various ways for managers of open-ended funds to manage liquidity. These include swing pricing, where the net asset value of a fund is adjusted to reflect costs incurred when investors buy or sell into the fund. Another suggestion is to impose subscription or redemption fees, charging a fixed fee to redeeming investors to cover liquidity costs.
John Schindler, FSB secretary-general, states that these tools can prevent redemptions from negatively affecting remaining investors. Moloney describes the proposed measures as a way of imposing a cost on redeeming investors to cover the recognized costs that arise when someone redeems from the fund. The goal is to establish a coherent and systematic approach globally, ensuring that departing investors pay the full cost.
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