Market mayhem in March sparked by the coronavirus pandemic led to a “pandemonium” in traditional safe havens, according to a report by Cerulli Associates.
Redemptions hit all asset classes, although alternatives were safeguarded by the different redemption terms and valuation cycles of closed-end fund structures and private markets, meaning they were not dumped to the same degree as their liquid siblings, the study found.
Justina Deveikyte, associate director, European institutional research, said: “A long-held belief that bonds hold their value in times of volatility has made them a traditional haven.”
But, she added, this was not the case in March when around €175 billion was withdrawn from fixed-income funds in Europe, almost eight times more than the €22 billion of outflows the month before.
Sharp drops and subsequent outflows hit every bond category, but high-yield investors in euro-denominated mutual funds in riskier areas, such as emerging markets and corporate debt, were hardest hit.
Meanwhile, European mutual equity funds also experienced “historic” outflows, with an estimated €71 billion leaving the asset class in March, at the peak of the volatility.
According to the research, extreme volatility and outflows saw asset managers gating bond funds in the face of wide spreads between the funds’ net asset value and intra-day prices in some cases. Nordic bond funds were hardest hit, the study said.
The suspensions have caught the attention of regulators, said Deveikyte. French and German watchdogs have started demanding daily updates of investor withdrawals from open-end funds.
Authorities in Luxembourg and Ireland are also monitoring the sector, while in Sweden, alarm is growing that high-yield corporate bond investors were not aware of the risks they faced, triggering some calls on funds to adjust their marketing practices, she added.
In Germany, where the only tool on offer for funds facing a liquidity squeeze is fund suspension, regulator BaFin is exploring solutions via swing pricing and redemption gates.
Although investors are “tentatively” returning, the suspensions could see some investors lose their appetite for liquid funds that gate redemptions.
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