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FSA tells firms to look at underlying liquidity

The FSA is warning fund managers to consider the liquidity of underlying investments after recent fund suspensions.

At the FSA’s future of fund management conference last week in London, asset sector management leader Dan Waters said fund suspensions must only be used in exceptional circumstances and not as a “convenience” to deal with problems caused by poor liquidity management.

He said: “Some of you will have followed the case of the recent CF Arch Cru fund suspensions. These were two non-Ucits retail schemes whose ultimate underlyings were illiquid assets.

This is not the first open-ended fund suspension we have seen during the market crisis. Other jurisdictions have seen a growing number of open-ended funds suspended as a result of liquidity problems.” He said suspensions, when appropriate, protect the interests of unitholders but the detriment to investors who cannot access their cash should not be underestimated.

He said: “We expect managers to carefully consider, on an ongoing basis, the liquidity profile of their current and potential future underlying investments as well as interaction with the scheme’s overall liquidity requirements.”

Chelsea Financial Services managing director Darius McDermott says: “With property, it is inherent that there will be certain stages in the cycle where funds will be illiquid because they have to go and sell big buildings.

“Fund groups need to be more careful about which large chunks of fund of fund money they accept and on what terms.”

Hargreaves Lansdown senior analyst Meera Patel says: “Cautious funds should not be suffering massive liquidity issues. There have to be some measures put in place to stop this.”

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