Liquidity in Luxembourg’s funds is a key concern for the CSSF, Luxembourg’s financial regulator. With all asset class crashing over the last month, investors have had no easy safe-haven options, and many have sought to sell up and hold cash. However, to date, this stress appears not to have led to the suspension of any Lux fund.
Since the latest strains on financial markets appeared, the CSSF has sought additional information from Luxembourg-based fund management companies about extreme outflows, local industry professionals have told Investment Officer. “Funds that are seeing redemptions of more than 10% per day or 30% per week in their net asset value are being asked to report this to the regulator. This request has never been made previously,” said one. . It is also thought that the Irish regulator (which oversees the EU’s other major cross-border fund distribution hub) is making similar enquiries.
Challenge for liquidity
The regulators are keen that any outflows do not negatively affect funds’ liquidity. They also want to check that the sale of assets does not change the nature of the portfolio away from that described to investors in the fund prospectus. There is evidence of an outflow, with Morningstar pointing to over €50bn in redemptions from Luxembourg equity and bond funds in March. A significant sum, but this only represents just over 1% of the €4.7trn total net assets of the sector at the end of January.
In the month to the low point on 23 March the Dow Jones fell by a third, while 10-year Treasury also fell sharply last week. Even gold is currently about 10% off its late February high. This has inevitably spooked many investors, with some seeing the least worst option being cash.
Credibility test
So with so many investors fleeing, it is a test for Luxembourg’s UCITS funds be able to honour their promise of daily redemptions. And when they do so, what will be left behind for the remaining investors? This is a major test for the credibility of the country’s fund sector: the world’s second largest fund domicile and the leading cross-border distribution centre.
Luxembourg’s Ucits funds have avoided the fate of the UK-based Woodford Equity Income Fund. This fund had made a range of high risk illiquid investments last year, but the value of these was under the 10% limit required by the UCITS regulations. However, when savers began to tire of the fund’s poor performance and withdrew, Woodford was unable to cash-in the illiquid holdings, leaving the company in breach of the 10% limit on illiquid holdings. Redemptions were suspended in June 2019, and the fund is currently being wound up. Stranded investors are set to receive just 56% of the £3bn (€3.21bn) fund’s June valuation.
So far, so good
So far so good too for the alternatives sector in Luxembourg. Although destined for experienced wealthy and institutional clients, some property funds in the UK have been caught out by investors heading for the exit. On Tuesday 17 March two Kames Capital real estate funds were “gated”, restricting investor’s ability to sell. As nervousness grew, big names such as Janus Henderson, Columbia Threadneedle, Aviva Investors, Aberdeen Standard Investments, BMO GAM and LGIM all felt obliged to follow suit.
“The UK real estate funds experiencing these issues tend to offer daily redemption options, which can be difficult to realise,” noted Camille Thomas, director general of the Luxembourg fund trade association ALFI. “The overwhelming majority of Luxembourg property funds are closed-ended, so will not experience similar problems,” he added. Indeed the UK regulator the Financial Conduct Authority noted on Thursday 19 March “legitimate questions” around offering daily redemptions on such illiquid assets as real estate, in an echo of similar comments made after the Brexit vote in 2016, when the property funds of the same asset managers also closed temporarily because they couldn’t meet redemption requests.
Overall Thomas is cautiously hopeful that Luxembourg-based funds and their service providers have been up to the challenge. “Our members have no obligation to report to us, but so far I have not heard of any suspensions,” he said.