INTERNATIONAL: Fitch Ratings – More Mutual Funds Suspend Redemptions Due to Liquidity Mismatch

Wednesday June 24 2020

In a new report by Fitch Ratings, that have said that at least USD62 billion of global mutual funds have suspended redemptions this year to date due to coronavirus-driven market stress.

This is already well above recent full-year volumes and is symptomatic of limited holdings of highly liquid assets to meet any sudden increase in redemptions. Fitch Rating believe that the spate of suspensions and application of other extraordinary liquidity-management tools will lead investors to re-appraise the liquidity that mutual funds can provide, particularly when invested in less liquid assets. Regulators have identified property, high-yield bond and emerging market debt funds as most exposed to liquidity risk.

This year’s redemption suspensions have been primarily driven by valuation uncertainty, in contrast to those over the last ten years, when outflows accounted for about two-thirds of cases (by assets under management).

Funds’ ability to maintain liquidity has been significantly helped by central bank support in the US and several other markets, which might not be so forthcoming in future periods of market stress. Fitch expect that widespread use of extraordinary liquidity-management tools will still be a theme in future market stresses unless regulators take steps to reduce liquidity risk across the sector. A move to non-daily dealing, for example, could mitigate liquidity risk, although it would face significant obstacles to implementation. Daily dealing is the norm for European retail and institutional funds.

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