View more on these topics

Meera Hearnden: Beware the return of redemption gates


Since the financial crisis hit its nadir in 2008/2009 asset prices on the whole have performed well. Major global equity markets have rebounded, government and corporate bonds have seen their yields compressed and property prices have climbed.

Nonetheless, as global economic uncertainty increases and volatility becomes prevalent there is a risk investors may rush for the exit, causing panic selling in some asset classes. If this happens, it would not be unusual for fund providers to impose restrictions on redemptions; in other words, put in place redemption gates.

Redemption gates are used to limit the amount of withdrawals allowed from a fund during a specific period of redemption. The aim is to prevent a ‘run’ on it that could potentially stop its operations and create a large sell off of asset positions.

In July 2014, the Securities and Exchange Commission voted to approve new rules that govern money market funds. The purpose of this change was to address the risk of investors rushing for the doors during times of stress and declining liquidity.

The new rules for redemption gates state that, if the weekly liquid assets for money market funds fall below 30 per cent, a fund’s board of directors may temporarily suspend redemptions for up to 10 business days in any 90-day period and even impose fees on redemptions.

While these reforms are designed to increase transparency and to protect remaining investors during periods of stress, placing such barriers on funds is nothing new.

Indeed, the UK commercial property market came under liquidity pressures in the early 1990s and then again in the global financial crisis of 2008 when many property funds had to shut their doors on withdrawals following redemptions by investors. The issue of illiquidity in the UK commercial property market could not have been more prevalent at the time, as investors were unable to access their money for up to a year.

Similarly today, the limited liquidity of the corporate bond market is seen as a rising threat. There are concerns that when the interest rate cycle turns, bond investors may think they can withdraw their money on demand even though the assets held by their funds are long-term debt and can be difficult to sell in a crisis.

Some funds have already seen redemptions but, at the moment, groups can use other tools to manage the outflows, such as invest in more liquid derivatives, maintain large levels of cash, impose dilution levies or swing pricing. The introduction of a formal “gate” could change investor behaviour entirely. The psychology of preventing investors from accessing their capital could almost certainly result in panic selling across the asset class.

Although some restrictions may become necessary as the pace and size of redemptions in the bond market increases, these should be to protect long-term investors remaining in the fund.

Additionally, asset allocators and pension fund investors will still have a requirement to maintain allocations to fixed income assets, so the redemptions may not be as large as expected. What is more, those who sell have few places to put the investment without impacting their risk and return profile, posing a real dilemma for investors.

It is rarely ever a smooth ride in the world of investments. The risk of chopping and changing asset classes frequently can also have its drawbacks, particularly if the upturn in the cycle is missed. In the case of the bond market, while there may be a period of redemptions, we would hope the outflows are managed sensibly without the need for harsh restrictions on withdrawals.

My key message for long-term investors is that maintaining diversification across a number of asset classes and through different market cycles can lead to attractive risk adjusted returns. Investors should not lose sight of this, particularly in difficult markets.

Meera Hearnden is senior investment manager at Parmenion



Woodford shuns ‘impenetrable’ banking sector

The banking sector is facing “very challenging headwinds” and is “pretty impenetrable”, says Neil Woodford, which is why he is not invested in the sector. Woodford, speaking at the AJ Bell Investival conference in London last week, says he has been out of the banking sector for “a long time”, largely because he finds the […]


Opinion poll

The report (Money Marketing, October 25) that Marlborough Stirling&#39s research has found that 53 per cent of people prefer not to meet their financial adviser in person flies in the face of general perceptions. It also contradicts other (perhaps more disinterested) research studies as well. Typically, you would expect to find that some 70 per […]


Ball and chain: FCA under fire as advice confusion blocks guidance offerings

The FCA’s continuing failure to clarify regulatory grey areas is preventing providers from developing guidance solutions for consumers, industry experts warn. The FCA last attempted to explain its views on the boundaries between classes of consumer support in a January paper, which broke down advice offerings into categories of simplified, regulated, limited, focused and generic. But experts […]


Govt to tackle GARs advice confusion

The Government could scrap the requirement to put a value on guaranteed annuity rates when deciding whether savers need to take regulated advice. A Department for Work and Pensions consultation, published today, sets out a proposal that would see the advice threshold based solely on the size of pots, not the value of guarantees. In […]

Mark Page: why my biggest overweight stock is a discount Spanish retailer

Artemis European Opportunities Fund manager Mark Page is questioned about the merits of investing in Spanish supermarket group, Dia. Dia is a 7,000-store Spanish discount supermarket chain. But with cheaper food prices coming on to the market and an improving Spanish economy, journalist Alexis Xydias questions Mark about its inclusion in the Artemis European Opportunities […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm