Retail managed funds have responded well to COVID-19 challenges in 2020 and their liquidity frameworks were generally adequate, according to a review by the Australian Securities and Investments Commission (ASIC).
The review, which covered 14 registered funds across three different strategies (four mortgage, five direct property and five fixed income funds) with an aggregate of
$1.7 billion in assets under management (AUM) and approximately 8,500 investors, found that while there was a significant drop in net investor cashflow in the first half of 2020, responsible entities of these funds did not tighten members’ ability to withdraw their investments.
ASIC found that across the 14 funds:
There was a significant deterioration in cash received from investor applications versus cash paid out in investor redemptions across the funds during the first half of 2020. The average net investor cash flow declined from 19% of the funds’ net asset value in the last quarter of 2019 to 3% in the first quarter of 2020, before a moderate recovery to 6% in the second quarter of 2020. However, this deterioration had little to no negative impact on investor redemption opportunities or on the size and frequency of distributions paid to investors;
- There was no material decrease in the liquidity of fund assets over the first half of 2020. For example, on average, the most liquid assets of the four mortgage funds increased from 4% of their funds’ asset value as at 30 June, 2019, to 5.6% as at 30 June, 2020. The funds’ least liquid assets decreased on average from 80.7% of their funds’ asset value as at 30 June, 2019, to 68.6% as at 30 June, 2020;
- Most of the funds’ responsible entities introduced enhanced liquidity monitoring in March 2020, then eased back on this over the following quarter;
- The responsible entities’ liquidity frameworks were generally adequate. All funds had multiple ways available to manage investor liquidity, such as the right to suspend or stagger redemptions, to charge and adjust redemption fees and to borrow money to pay redemptions;
- Overall, liquidity risks and redemption rights were appropriately disclosed to investors; and
- Responsible entities reported a mixed but not severe impact on fund revenues because of COVID-19.
ASIC’s findings were consistent with feedback from industry associations about their members’ experiences of the COVID-19 impacted market.
ASIC deputy chair, Karen Chester, said: “Overall, the responsible entities we reviewed well managed the liquidity challenges and market disruption of COVID-19. As the economic situation improves through 2021, responsible entities should continue to carefully manage the liquidity risks associated with their funds”.