Following redemption suspensions by several French mutual funds, Fitch Ratings warns that liquidity remains a key risk to mutual fund investors.
In a new report, the rating agency said that the suspension of redemptions by eight funds with around €10.1 billion in assets under management (AUM) on Aug. 28 demonstrates that a lack of liquidity “remains a key risk for mutual fund investors, particularly where funds invest in less-liquid securities.”
France’s Autorité des marchés financiers ordered the suspension of three funds to protect investors’ interests, Fitch said, and the fund manager voluntarily suspended five other funds which had exposure to the three suspended funds.
“This highlights the risk of contagion to funds managed by the same investment manager and to financial markets more broadly,” Fitch noted.
These latest suspensions were driven by valuation concerns, Fitch reported, noting that similar issues are behind all of the redemption suspensions so far this year. In 2020, 117 European funds with €54 billion in AUM have suspended redemptions, the rating agency said.
In the past, “outflows were the main driver of mutual fund suspensions,” Fitch noted.
Liquidity risk has been a key concern for regulators amid the market disruptions caused by the Covid-19 pandemic.
Back in April, the Canadian Securities Administrators granted temporary relief to mutual funds doubling borrowing limits from 5% of NAV to 10% in order to give funds more flexibility to cope with the pandemic-driven disruption in financial markets.