A growing number of European mutual funds have suspended redemptions amid rising investor outflows, Fitch Ratings reports.
The rating agency said that at least 76 European funds, representing a collective US$40 billion in assets under management (AUM), halted investor redemptions in March.
Fitch said the redemption shutdown stemmed from “increased demand for withdrawals from investors concerned by financial market volatility amid the coronavirus pandemic.”
The firm also reported that trouble pricing funds’ holdings underpin the vast majority that moved to shut down redemptions.
“Funds with higher exposures to lower-quality securities and those with exposure to sectors under greater stress are also more likely to [suspend redemptions], particularly when experiencing increased outflows,” it said.
Additionally, funds with significant liquidity mismatches, which are compounded by large outflows in a short period of time, are most likely to suspend redemptions, Fitch said.
“Mismatches are most acute in funds that invest in less-liquid assets while holding limited amounts of liquid assets,” it said.
The report also suggested that the true extent of funds that have suspended redemptions is likely understated, as public disclosure from funds is limited.
Even so, Fitch said, “We do not believe that the spate of fund gatings poses an immediate risk to the broader financial system,” noting that the total remains small relative to overall AUM, which was about US$19 trillion at the end of 2019.
“However, the interconnectedness of the financial system means that fund gatings can spread, giving rise to contagion risk.”
Last week, the Canadian Securities Administrators (CSA) announced that they have raised the limit on mutual funds’ short-term borrowing to enable them to meet rising redemption demands.