State Street Global Advisors Australia (SSgA) faces anger from investors in 13 of its trusts, which have increased buy/sell spreads and diluted redemptions due to ongoing problems with securities lending programs associated with the trusts.
On May 1, SSgA issued a supplementary PDS for its 13 funds which had participated in securities lending, informing investors that any redemption over $2.5 million would now be paid out only partially in cash, and the rest as an in specie transfer of asset-backed securities from the collateral pool associated with State Street’s global securities lending programs.
Understood to be the only major indexer in Australia that attached sec lending to its funds, SSgA invested the cash it received as collateral for loaned securities in money market and intermediate-term asset-backed securities, the secondary markets which had become “dysfunctional”, according to SSgA product engineer Jonathan Shead.
An investor in SSgA’s Global Index Plus Trust angrily dismissed the collateral being offered in lieu of all-cash redemptions as “toxic waste”, and questioned why SSgA was not marking the collateral to market in its pay-out calculations, when departing clients would have to mark the assets to market and take an immediate performance hit.
SSgA had already increased the buy/sell spreads on the affected funds late last year. Shead said that increase had been anywhere between 20 and 50 bps depending on the proportion of assets a particular fund had on loan, and admitted the increase more than doubled the spread in some cases.
“We’re doing everything we can to be equitable to all investors…[the higher buy/sell spreads] reflect the increased transaction costs of liquidating the collateral from our securities lending programs when there’s very poor liquidity in the secondary markets.”
This month’s introduction of in specie redemeptions was a further step to protect continuing investors, Shead said, so that their exposure to collateral assets was not unduly increased. He added there was scope to reduce the redemption spread for departing investors who accepted some of the securities lending collateral.
Market sources indicate a typical SSgA investor is having about 90 per cent of their redemption paid in cash.
Shead rejected any suggestion the collateral assets were toxic, saying there had been no impairments and that “95 per cent” of the assets retained the AAA rating they had originally required.
In a May 1 letter to clients, SSgA senior managing director Rob Goodlad said it was intended that the new redemption policy be temporary.