Global mutual funds are showing the strain from stressed markets as redemption suspensions hit a 10-year high, according to Fitch Ratings.
In a new report, the rating agency said that US$62 billion worth of mutual funds have suspended redemptions so far this year. This is already double the volume recorded last year, and marks the highest level in the past 10 years.
Fitch said that the redemption suspensions this year “have been primarily driven by valuation uncertainty,” whereas rising fund outflows have been the motivation for most suspensions in recent years.
“We believe that this will lead to greater regulatory and market scrutiny of how fund managers determine asset valuations and apply liquidity management measures,” Fitch said.
In particular, the report noted that regulators have identified property, high-yield bond and emerging market debt funds as most exposed to liquidity risk.
Despite the market stress, and the sharp increase in suspensions, most funds have continued to provide daily liquidity this year, Fitch noted.
Indeed, the US$62 billion worth of funds that have suspended redemptions only represents 0.11% of total global mutual fund assets, Fitch reported.
Fitch attributed the continued prevalence of daily liquidity to fund managers’ increasingly sophisticated liquidity risk-management techniques combined with regulatory relief measures, and central banks’ adoption of extraordinary liquidity measures in the face of extreme market stress.
In Canada, in response to liquidity concerns, securities regulators temporarily doubled the short-term borrowing limit for mutual funds from 5% of net asset value to 10%.
Longer term, Fitch said that it believes the surge in redemption suspensions and other liquidity management efforts “will force a fundamental investor re-appraisal of the liquidity that mutual funds can truly provide, particularly when invested in less liquid asset classes.”
“A move to non-daily dealing, for example, could mitigate liquidity risk, although it would face significant obstacles to implementation,” Fitch said.