The U.K. is stepping up its review of open- ended funds to prevent the growing industry becoming a threat to financial stability and the economy.
The review follows a number of recent issues with some funds, including a decision by star stockpicker Neil Woodford to freeze withdrawals from his flagship equity fund earlier this year.
The Bank of England will examine short-notice withdrawals from funds where the investment assets -- such as commercial real estate -- can’t be sold quickly at the market price.
A blunt option could be to ban one-day withdrawals in some cases, but regulators are looking at various ideas, including applying fair-value discounts for investors looking for a quick exit. That could prevent remaining investors losing out and avoid sparking a “run” on a fund.
The review will also look at how they calculate their net flows and show they could meet withdrawals on an asset from inflows or other sources.
The problems at Woodford are just the latest in a string of difficulties at open-ended funds that the BOE believes could create systemic risks. The bank’s Financial Stability Report released on Thursday cited significant redemptions in early 2019 as Brexit uncertainty spiked.
A global macro fund run by H2O, which is backed by Natixis SA, has also drawn concern in the global market, as investments in unrated bonds spurred billions of dollars’ worth of withdrawals in a matter of days.
The BOE noted the growth in the industry, pointing out that flows into commercial real estate from abroad and U.K. leveraged loans syndicated abroad accounted for 17 billion pounds in the year to early 2019. That’s almost a fifth of the size of the U.K.’s entire current account deficit.
The central bank, along with the U.K.’s Financial Conduct Authority, will look at the “costs and benefits of aligning redemption terms, including pricing and notice periods, with the typical time it takes to realise market prices for funds’ assets in normal and stressed market conditions.”
By Marion Dakers and Lucy Meakin