Asset managers need to prepare for large-scale outflows leading to a lack of liquidity in funds post-Brexit, experts warn.
Old Mutual Global Investors chief executive Richard Buxton urged investors to “brace themselves for an unpleasant period of relatively indiscriminate selling” after the UK voted to leave the EU in the referendum, as funds aim to meet redemptions amid restricted market liquidity.
PwC UK asset management leader Mark Pugh says those asset managers that are not able to handle outflows and liquidity issues will not escape unnoticed.
“Regulators have been focused on liquidity risk for some time and the asset management industry should already have stress tested for this outcome, but those who prove unequal to the task can expect scrutiny,” he says.
Hargreaves Lansdown senior analyst Laith Khalaf says that while a lot of asset managers have stress tested their funds’ liquidity, it remains to be seen to what extent they have done that.
He says: “Managers are in a position where they can liquidate their portfolio very quickly but they need to find someone that will buy. However, the market today bounced back after the morning fall and that suggests people are buying.”
He says small caps funds will sell-off more than blue chip funds as there are fewer investors in that market, meaning that they may face more liquidity problems.
Thomson Reuters head of Lipper UK and Ireland research Jake Moeller pinpoints strategic bond and absolute return funds as also being likely to see outflows, continuing a trend from pre-Brexit.
Morningstar chief investment officer for EMEA Dan Kemp says less liquid funds are likely to face the brunt of it, as “investors lose confidence and divest” money.
“Particularly dangerous now is liquidity for leveraged investments and so it is important to look at some hedge funds holdings managers have and how they’d be impacted,” he adds.
Tilney Bestinvest managing director Jason Hollands says one saving grace is the level of cautiousness among a number of fund managers in the lead-up to the referendum, meaning many had retrenched in cash.
“A lot of fund managers have had more elevated levels of cash in their funds in the past year and not just because of Brexit but also because they were cautious on markets in general,” he says.
“I don’t think Brexit will be a catalyst of liquidity issues and I don’t think funds will suspend daily dealings but a bigger issue could be if you see liquidity drying up in the credit markets rather than in the equity markets.”