Investing Fiva investigates fund liquidity: A year ago, dozens of corporate bond funds suspended redemptions for up to a week

Market supervisor Anna Mäkipeska’s real estate investment funds survived the supervisor’s stress test well.

Financial Supervision According to (Fiva), dozens of funds investing in corporate bonds had to suspend fund subscriptions and redemptions for more than a week last spring. The interruptions were due to disruptions in the corporate bond market.

As the securities market collapsed as the corona epidemic escalated, no buyers were found on the market for all corporate bonds, and therefore no fair price.

“It was difficult for the funds to find reliable value in the market for the fund’s investments. Interruptions in subscriptions and redemptions lasted from 1 to 8 days and were due to an exceptional market situation, ”the market supervisor Anna Mäkipeska says.

In total, 37 funds registered in Finland suspended subscriptions and redemptions during the crisis.

Fiva Following the market turmoil in the spring, the Commission launched an assessment of the liquidity management of corporate bond funds and so-called real estate investment funds. The study was launched at the initiative of Esma, the European Financial Market Authority, in other EU countries as well.

Liquidity management of the fund means that the fund has sufficient cash or other easily convertible assets to cope with the withdrawals announced by the unit-holders.

Some real estate investment trusts and corporate bond funds in other European countries had experienced problems with redemptions in the spring when uncertain investors suddenly wanted to redeem their investments unexpectedly.

In Finland, too, exceptionally large withdrawals were made from many corporate loan funds.

“One of the real estate investment funds announced higher-than-usual withdrawals last spring, but that didn’t cause the fund any problems. There were enough liquid funds, ”says Mäkipeska.

The investments of real estate investment funds, ie apartments or commercial premises, are usually not sold very quickly, unlike, for example, listed shares or bonds. Therefore, the liquidity of these funds involves exceptionally high risks.

Real estate investment funds can usually only be withdrawn every three months and withdrawals must be announced in good time.

Fiva commissioned a stress test of the funds selected for closer scrutiny, which tested how well the funds would cope with higher-than-usual redemptions in a situation where the securities market is at a time of crisis.

“All special investment funds investing in real estate passed the test. Improvements were identified in processes and procedures, such as how liquidity management is reported to management and administration. There must be processes in place to monitor and report liquidity risk, ”says Mäkipeska.

For corporate bond funds, two out of eight funds would not have been able to respond to redemptions immediately in the stress test assumed market turmoil. However, even in this situation, all funds would have been able to pay redemptions within a month.

According to Fiva, the results were affected by the different ways in which the management companies assess the liquidity of the funds, so the results cannot be considered fully comparable.

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