ANNOUNCEMENT: Expert Investor is now PA Europe. Read more.

Fund selectors sour on illiquids after scandals

Over three quarters of fund selectors polled in Luxembourg said they were avoiding illiquid assets at present time

More than half of Luxembourg fund selectors polled at Expert Investor’s Luxembourg half-day event last month said they were “not interested” in illiquid strategies following a series of sagas and blowouts over the last year related to risky overexposure to illiquid assets.

Fifty three percent of fund selectors polled at Hôtel Le Royal in Luxembourg on June 20 said they were not interested in illiquid assets, such as private equity, private debt and infrastructure, while a further 26% said while they would consider using them – their clients would not.

[visualizer id=”9794″]

The survey shows a fall in sentiment towards in the asset class from earlier this year. Illiquid strategies risen in popularity in Q4 2018 and Q1 amid weak bond yields and market volatility, according to Last Word Research which surveys hundreds of fund selectors across Europe every quarter.

But the furore surrounding British investor Neil Woodford’s withdrawal freeze from his flagship €4.1bn fund last month as well as liquidity-related concerns at H2O Asset Management’s bond funds, and Gam’s liquidation of its €9.5bn absolute return range last year has dampened investor sentiment towards illiquid assets.

At the end of June, Bank of England governor Mark Carney, warned that illiquid holdings within open-ended investment funds could represent a systemic threat to the global financial system.

Carney’s admission to the UK’s Treasury Select Committee followed week of coverage dedicated to Neil Woodford’s Equity Income Fund which suspended redemptions at the beginning of June. Woodford Investment Management told investors they would be unable to make withdrawals from a fund after underperformance triggered a wave of large redemptions.

Fund selector concerns

Many fund selectors have become more vocal about their concerns with illiquids in recent weeks.

“We would ideally not hold any illiquid assets in our client portfolios,” Patrick Connolly, head of communications at financial advice group Chase de Vere told Expert Investor. “The problem comes about if investors don’t understand liquidity risks or are over-exposed to illiquid assets.

“However, there are circumstances where we need to accept some illiquidity in order to access other benefits. Our challenge is to manage any illiquidity in line with our clients’ circumstances, objectives and attitude to risk.”

Connolly said that commercial property is a prime example, because it can produce a reliable income and offers strong diversification benefits.

“There are potential downsides investing in commercial property in either an open-ended or a closed-ended structure,” he said. “We typically use open-ended funds even though there are liquidity concerns.”

Connolly, who is also a certified financial planner, said the Woodford affair showed the importance of diversification.

“Even if investors might think that liquidity isn’t a concern, it still makes sense to ensure that you have a properly diversified portfolio and that they aren’t over-reliant on any particular asset class, investment company or investment fund,” he added.

Of the fund selectors surveyed at the Luxembourg event, 16% said they “actively looking to put significant AUM” into illiquids, while just 5% said they were “well established users” of illiquid strategies.

  • Can M&A and buybacks breathe life into UK market?

    Can M&A and buybacks breathe life into UK market?

    Both buybacks and M&A should help realise value in UK shares, boosting prices and giving investors another reason to consider the UK stockmarket Not only does M&A activity appear to be picking up, with a high-profile bid for UK electronics retailer Currys, but the scale of company buybacks continues to accelerate. If it goes well,…

  • Capital Group launches multi-thematic Article 8 funds

    Capital Group launches multi-thematic Article 8 funds

    Capital Group has launched a set of multi-thematic sustainable funds that are available for investors in Europe, writes Christian Mayes. The Capital Group Sustainable Global Opportunities fund (LUX) will invest in global equities, while the Capital Group Sustainable Global Corporate Bond fund (LUX) will target fixed income exposure. The launch also includes a multi-asset offering…

  • Bond funds pull in €29.7bn in January – LSEG

    Bond funds pull in €29.7bn in January – LSEG

    Bond products were the best-selling asset class in January, according to LSEG Lipper’s European Fund Flow report, writes Christian Mayes. The asset class pulled in a net €29.7bn in the month, while Money Market USD grouping was the best-selling Lipper Classification after receiving €11.2bn inflows. Providers of mutual funds pulled in €22.5bn, while passives saw net…

  • Quarter of Article 8 funds at risk of greenwashing – MainStreet Partners

    Quarter of Article 8 funds at risk of greenwashing – MainStreet Partners

    A quarter of all Article 8 funds could be accused of greenwashing based on their sustainability framework and practices, according to MainStreet Partners, writes Christian Mayes The 24% of funds classified as a greenwashing risk by the 2024 ESG Barometer report marks a four percentage point increase from the 20% flagged at the end of…

  • EU green rules could stymie decarbonisation projects – ExxonMobil

    EU green rules could stymie decarbonisation projects – ExxonMobil

    The European Union’s climate regulations may lead to it halting its investments in Europe, ExxonMobil has warned. Speaking to the Financial Times, Karen McKee, president of the product solutions division, said the oil and gas giant had struggled to begin decarbonisation projects in Europe due to the regulatory burden. The result, she added, was that…

  • ICE flags need for Europe to double green investment

    ICE flags need for Europe to double green investment

    Investments to modernise energy and transport must double by the end of the decade to reach 2030 climate targets, the EU has been warned. According to the Institute for Climate Economics (ICE), which has released the European Climate Investment Deficit report, the bloc lacks what it calls a “consistent tool” to ensure monitoring of the…