Global regulators recommend exit charges for property funds

Receive free updates on investing in funds

we will send you one myFT Daily Digest Latest Email Rounding investing in funds News every morning.

Global financial regulators have recommended that fund managers investing in hard-to-sell assets like property should charge clients for withdrawing cash, to discourage rush to withdrawals.

The Financial Stability Board and the International Organization of Securities Commissions published guidance for asset managers on Wednesday, asking investors who pull their money out of open-ended funds — a portfolio that allows investors to put in or take out cash on a regular basis. Gives – they should not be harmed. The subscribers are choosing to remain in the Fund.

The guidelines come at a time when global authorities are struggling to deal with the coronavirus scare that hit markets in March 2020, forcing investors to sell assets ‘for cash’ and increasing market volatility .

Property funds in particular, which can take time to sell assets, have come under pressure in recent years as investors have rushed to cash out, fearing rising global interest rates and low valuations of commercial real estate. Regulators worry that if they force the fund to sell illiquid assets at a low price, redemptions could spiral out of control, making investors more fearful.

“A large part of the fund industry is one with significant illiquid assets,” said Martin Moloney, general secretary of Iosco.

“There are some obvious candidates,” he said. “If you think about the turnaround time to get rid of a property asset, it is very long, i.e. months, and if you are offering daily redemption to someone with an asset that takes months to issue , so clearly it happens to be a timing problem.”

Blackstone limited withdrawals from its real estate income trust in December and this year Blackrock began paying back investors stuck in its UK property fund since early last year. UK fund managers including M&G, Schroders and Columbia Threadneedle have also limited withdrawals in their UK real estate funds after already experiencing an increase in redemption requests.

Regulators have taken note. The European Central Bank earlier this year warned of a “decline in market liquidity and a price correction”, adding that open-ended real estate funds are vulnerable to “structural liquidity mismatches between their assets and liabilities”.

The FSB and IOSCO are recommending a number of methods for managers of open-ended funds to manage liquidity. These include swing pricing, a mechanism whereby a fund’s net asset value is adjusted up or down when investors buy or sell in a fund to reflect costs.

Another recommendation is for subscription or redemption fees, where a fixed fee is charged for redeeming investors “for the benefit of the fund to cover the cost of liquidity”.

“These tools can be used. , , FSB Secretary General John Schindler said, “Prevent the negative impact of the redemption on the remaining investors.”

“Basically it works like a fee,” Moloney said of the proposed measures. “It’s about imposing a cost on the cashing-out investor that we’ve long recognized when someone cashes out of a fund.”

He added that both authorities want to “provide a more consistent and systematic approach around the world to ensure that the investors who are leaving are paid the full cost.”