The UK’s financial services regulator has said asset managers are putting investors at risk by not adequately monitoring the liquidity of their funds.
(Bloomberg) — The UK’s financial services regulator has said asset managers are putting investors at risk by not adequately monitoring the liquidity of their funds.
Many mutual fund houses did not properly use their liquidity management tools and failed to understand the risks of less liquid assets held in their portfolios, the Financial Conduct Authority said following a multi-firm review.
Some firms’ models assumed that they would always sell their most liquid assets first, the FCA said, but didn’t consider the knock-on effects.
Firms also typically had arrangements in place only to meet large one-off redemptions but did not consider cumulative or market-wide outflows that could have a significant impact on a fund.
The issue was on display in 2019 when Neil Woodford’s equity fund was gated following large-scale redemptions.
And the UK’s gilt crisis last year caused havoc among money managers as pension funds trying to meet margin calls shed some of their holdings.
Read More: UK Lays Out LDI Fund Reforms After Last Year’s Market Mayhem
In 2022, there were 16 fund liquidity breaches reported to the FCA, according to a Freedom of Information request to the watchdog made by Bloomberg News.
The FCA report noted that portfolio stress testing methodologies were inconsistent across firms and varied from “highly sophisticated in-depth models” to “basic tick-box exercises” and didn’t reflect extreme market volatility.
“Board and committee-level discussions on liquidity risk and associated reporting packs fell short of our expectations,” the review said.
“In many cases, liquidity risks were flagged only on an exceptions basis.”
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