Managing the investor base
Within the industry there is little support for setting caps on the proportion of a fund that can be owned by a single investor. The idea that particular investors might be required to divest part of their holding in a fund seems unreasonable.
However, there is clearly a need for dialogue with investors to understand likely investment and divestment intentions, and to build up an appropriate liquidity profile in response to those discussions.
Asset valuation and anti-dilution measures
There is a perception that suspending redemptions on a fund is akin to a run on a bank, which can trigger unwarranted knee-jerk behaviour. However, in reality suspension of redemptions is about allowing a period of price discovery as much as it is about raising cash to fund redemptions.
In periods of volatility, price discovery is extremely challenging, and suspensions provide space for markets to settle down to a point where price discovery becomes possible again.
Redemption discounts, as opposed to suspensions, allow a manager to adjust the redemption price in order to account for the valuation uncertainty. In the past, imposition of redemption discounts has been criticised on the grounds of the manager seeking to penalise exiting investors, whereas the reality is simply that discounts simply reflect a volatile market.
In terms of the governance process around pricing and valuation, it is the Depositary’s role to engage with the manager on pricing.
In turn, depositaries acknowledge that different fund managers have different approaches to valuation, which is appropriate given that valuations need to reflect the circumstances of particular funds.
Summary
There is room for rule changes in discrete areas. For example, intermediaries such as platforms and transfer agents could be required to make technology changes that facilitate the use of liquidity management tools other than suspension; and rule changes to require more granular disclosures around liquidity management tools might assist with transparency.
On the other hand, regulatory intervention in areas such as portfolio composition or regulator-imposed suspensions, risks taking the responsibility away from those with the expertise and experience to make the relevant decisions.
All industry participants need to work together openly to provide solutions in terms of robust governance, particularly in relation to asset valuations.
The asset management review is about creating trust in the industry and the industry must commit to change and be seen to do so.
More fundamentally, the regulatory approach to liquidity needed to be considered. A requirement for daily liquidity is driven by the regulator and by the tax framework.
But if investors can understand that they lose interest if they withdraw money from a high-interest savings account, surely they can also understand that they will lose returns if they invest in a fund that has to be managed to daily liquidity.
