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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


David Robinson

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.

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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.