Sept. 7, 2022
Taken from an article published in Portfolio Adviser on the 7th September 2022, here: Fund managers under pressure to shore up liquidity as wave of redemptions persists | Portfolio Adviser (portfolio-adviser.com)
The cost of living crisis, with the UK on the edge of recession and a winter of record energy prices around the corner, is forcing many households to re-evaluate their finances. This has made some investors reconsider their portfolios, with the Office for National Statistics (ONS) finding as of August that 11 million people were using savings to cover rising costs.
This attitude is impacting the UK retail asset management industry. The Investment Association’s (IA) most recent monthly fund sales data showed total funds under management to be £1.4trn in July 2022, down from £1.5trn the year before. While there were net retail sales of £4.9bn in July 2022 alone, there were net retail outflows of £129m a year later, though this was down from the £4.5bn of outflows recorded in the previous month.
Depending on the asset class, this can create challenges for portfolio managers who need to free up liquidity for redemptions. This is most apparent in asset classes where rapid transactions can be difficult to execute, such as in physical property. Open ended funds investing in physical property have been involved in high profile ‘gatings’ before in times of scarce liquidity.
Richard Latter, head of distribution at real estate trading exchange IPSX, says the risk of gating is still one for many investors, with liquidity at the forefront of many managers’ minds.
“Suspension of trading has become an all too real risk in recent years, with a number of high-profile examples which have severely dented market confidence in the structure of such funds,” says Latter.
“While putting a halt to a rush of investor outflows does serve a purpose in alleviating short-term liquidity issues and protecting wider interests, there’s a balance to be struck in determining such a move’s effectiveness as investors are rightly spooked by an inability to obtain their cash, and that’s hard for any fund to bounce back from.”
Other asset classes that may be a source of liquidity pain include high yield bonds, micro-cap equities and smaller investment trusts, according to Fairview Investing director Ben Yearsley.
However, he is more optimistic about the state of liquidity in the wider market. Explaining that most advised clients will be invested in open-ended funds focused on liquid markets such as government debt or large-cap equities, Yearsley instead warns against investors falling victim to short-term redemption panics.
“What investors have to be wary of is panic selling in a downturn – that’s what causes issues,” says Yearsley. “In essence, as long as you have a broadly diversified portfolio you don’t need to do much different. Of course, clients need their cash buffer of say six to 12 months’ spending and at least that today earns you around 2% interest.
“And don’t forget managers are being more circumspect now after the Woodford and property debacles.”
This sentiment is echoed by Emma Wall, head of investment analysis and research at Hargreaves Lansdown, who says outflow patterns are reflecting where investors are most able to access their capital.
“It’s not all money off the table across the board,” says Wall. “If we look at the fund flows on our platform as proxy for the wider industry, we are definitely seeing money coming out of those riskier assets that have seen higher levels of volatility.
“There is correlation between – by happenstance – areas where we are seeing clients taking money out, that also happen to be the most liquid. We are seeing money being taken out of US large-cap equities, for instance, which is one of the most liquid areas of the market.”
Given the current headlines facing investors – of soaring inflation and deep recessions – it is not surprising some have been taking capital out of the market. At IPSX, Latter expects this to continue with investors instead looking towards ‘safe-haven’ assets.
“My expectation is that this trend in increasing redemptions from funds is tied with general market sentiment and will last to 2023, tied to global instability and the cost-of-living crisis,” he says.
“In such a climate, investors are better convinced by any means of gaining exposure to secure and visible income streams leading them to redirect their capital allocations away from speculative equities towards the few perceived safe-haven assets.”
Others are not as convinced. Liquidity becomes a concern for fund managers when redemptions outstrip the assets in their portfolio, and despite the negative sentiment in markets currently, Hargreaves Lansdown’s Wall says the reality is not as stark.
The context she gives is that 2022’s market woes are the latest in several years of market volatility for fund managers who have had to deal with investors responding to uncertainties such as Brexit, a Trump presidency, and Covid-19.
“Of the managers we are speaking to, we haven’t had any concerns and they are managing liquidity well,” says Wall. “A number of them have been in steady outflow mode, incrementally, for some time.
“A lot of the hot money has already gone out. Don’t forget, the majority of UK retail investors are investing for the long term, many of which do it through regular savings. The ‘chunkier stuff’ comes from institutional investors, and those decisions do have an impact. But in the retail market, there is an element of inertia.”
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