The global financial crisis.
A phrase that
has become a cliché, and in danger of becoming the excuse de jour for a raft of
issues that have their cause much closer to home. Volatility, reduced wealth,
falling income and a lack of liquidity are the headline problems. Much
continues to be been done to create the right perspective on investing,
including appropriate timeframes, market cycles and the underlying soundness of
the financial system and real economy.
This cycle, like all others, will pass. Many
investors, however, experience the capital markets through managed funds and
platforms. So in addition to first order investment impact, the industry is
also facing a range of administrative problems caused by funds in distress. Fundstreme
is Ausmaq’s managed fund solution and supports an open menu of some 800
wholesale funds. Since mid-2007 over 50 of these funds have announced some
level of distress. To a degree this is typical of the experience of other
platforms (including wraps, super, pension and master funds).
distress has ranged from a temporary extension of redemption settlement times,
to a complete freeze of all activity. A small number of funds have also
re-opened to redemptions during this period. The decision to amend the
operation of a fund will be taken by fund managers in the interest of unit
holders. The administration of these distressed funds is very different to
their original operating profile. This has a significant impact on the ability
of platforms and advisers to service investors, keep them informed, and to meet
basic reporting needs.
Ultimately, the circumstances of every fund are unique
and potentially complex. The skills of the fund manager will be focused on how
best to restore core investment characteristics. In parallel, we are
encouraging a collaborative approach to the clear articulation of process
changes. Both are important in managing the overall experience of investors. The
first order investor concerns over volatility, falling income and lack of
liquidity can be compounded if basic administration and communication factors are
not fully addressed.
The critical focus for communicating process change is to
provide clear guidance on what, how and when. If the full extent of change is
not known at the time of the initial communication, then a program for
providing greater clarity should be put in place. While we view communication
as collaborative, there can be no doubt that the sole source of authentic
information on the status of the fund rests with the fund manager. Some of the
questions that should be addressed include: • If the fund is closing, is this
for all or just some transactions (applications, redemptions, switches or
• When, exactly, do the changes apply? • Is closure permanent or
temporary, when will the decision be reviewed, how will it be communicated? •
If deferred settlement rules are to apply, is the new process fully defined? •
If redemption windows are proposed, how are these to be administered? How do
different requests rank, is the liquidity rationing process transparent? • Will
administration of new access rules cater equally to direct investors as well as
to unit holders via platforms? • If redemption requests are accepted, but not
settled for extended periods, how will pending trades be tracked? • Will
distributions be affected, if so, how?
• Is there a lack of information on the
true value of the fund’s assets (and therefore suspension in unit pricing)? •
Are normal information flows affected? Will websites and/or written communications
to end investors be kept up-to-date? • Will formal reporting (statements, tax
reporting) by the fund manager be suspended or delayed? • Has the fund been
removed from active review by research houses? • How are changes in status
being reflected in platform menus and dealer group recommended lists?
• Has a
supplementary PDS been issued? • Can the fund manager provide guidance on their
intended treatment of hardship cases for exceptional redemption requests? It
will be a challenge for the whole industry to maintain the confidence of investors
during such times of stress. While it is inevitable that the market cycle will
turn, the memories of how the industry responded may linger a little longer. We
can’t turn to the last page of the book to see how it ends. It hasn’t been written
yet. What can be done is to provide a narrative that captures what is known,
clear communication, and a desire to jointly manage the journey.