French funds prospectuses miss out on mentioning liquidity management tools
Banque de France and the AMF have together carried out their first analysis of liquidity management tools implemented by French-domiciled funds. The authors of the study - Emmanuel Darpeix, Caroline Le Moign, Nicolas Même and Marko Novakovic – sieved some 9,768 French funds that were in operation as of 31 December 2019 (16,175 share classes analysed in total). Assets under management of these funds reached €1.6trn as of end December 2019, representing 98% of French funds’ total assets on that date.
The research’s authors first outline that a majority of equity funds (89% of their net assets), fixed income funds (88%) and money market funds (96%) showed a daily valuation. Conversely, funds considered least liquid had a weekly NAV (50% of net assets of French employee savings schemes), monthly NAV (50% of net assets of hedge funds), quarterly NAV (68% of net assets of real estate funds) or half-yearly NAV (51% of net assets of venture capital funds).
Only 14% net assets covered by one liquidity management tool
Banque de France and AMF’s joint research highlight that the possibility of completely suspending fund redemptions in exceptional circumstances was mentioned in 71% of the French funds’ prospectuses (or 82% of the French funds’ net assets) as of end December 2019. The type of products referring the most to this alternative are French formula funds (99% of their net assets), money market funds (91%) and equity fund (90%). Among those mentioning the least the freezing of withdrawals were real estate funds (48% of their net assets) and venture capital funds (6%). The option of proposing redemption in kind was indicated for 65% of fund unit classes (74% of net assets), the study finds out.
Nonetheless, very few prospectuses of French-domiciled funds refer to liquidity management tools. Only 14% of French funds’ net assets were covered by a reference in the prospectus to at least one liquidity management tool at the end of 2019. These tools include anti-diultion levies, gates, swing pricing mechanisms. Mentions of such tools were found more in Ucits funds (27% of their net assets, 64% in VaR) than in alternative investment funds (6% of their net assets).
Gates received the more mentions in French funds’ prospectuses at the end of December 2019 (7% of the share classes analysed or 9% of the French funds’ net assets) even though the analysis was not able to separate temporary and permanent gates. The authors pinpoint that less liquid funds referred to gates much more than their peers, especially hedge funds (32% of their net assets) and real estate funds (19%).
The swing pricing mechanism was mentioned for 7% of the share classes analysed, covering 6% of the French funds’ net assets. Fixed income funds (19% of their net assets) and equity funds (7%) were the main type of products referring to it in their prospectuses. References to anti-dilution levies were barely inexistent as only 1% of the share classes were associated to this liquidity management tool, representing less than 2% of the French funds’ net assets. ‘Significant’ mentions were found in prospectuses of equity funds (7% of their net assets) and funds classified as others (9%).
Lastly, 0.3% of the share classes studied (i.e. 0.2% of the French funds’ net assets) had side-pockets mentioned in their prospectuses and that was mostly hedge funds.
The authors of the study assess that a pedagogical effort is required to foster a greater uptake of these liquidity management tools by the funds, but also to ease their acceptability from the point of view of investors, whether retail or institutional. “In light of the current economic and financial situation in the context of the Covid-19 pandemic, it is possible that certain regulatory constraints may be adapted, but this document could nevertheless constitute a useful inventory of pre-crisis tools. In the future, this work could allow dynamic monitoring of the introduction of LMTs in French funds, and be extended to other jurisdictions or other issues,” they add.
Last month, Fitch Ratings estimated $62bn of global mutual funds had suspended redemptions worldwide between January and mid-June 2020, raising liquidity risk issues. The rating agency penned that the wave of withdrawal suspensions coupled to the implementation of other liquidity management tools would lead investors to reassess the liquidity investment funds can provide, in particular these invested in illiquid assets.