An ASIC review of a targeted selection of retail managed funds found that they did not face serious investor liquidity challenges during the height of COVID-19 market disruption, and that their liquidity frameworks were generally adequate.

While there was a significant drop in net investor cashflow in the first half of 2020, responsible entities of these funds did not tighten members’ ability to withdraw their investments. 

ASIC conducted the review between June and November 2020 to identify any potential liquidity issues faced by managed funds and respond to those if necessary.

The review covered 14 registered funds across three different strategies (four mortgage, five direct property and five fixed income funds) with an aggregate of
$1.7 billion in assets under management and approximately 8,500 investors. ASIC selected funds that it considered were at risk of facing liquidity issues due to a mismatch between investors’ expectations or potential desire to exit and the liquidity of the fund assets in a financially stressed market.

ASIC found that across the 14 funds:

• there was a significant deterioration in cash received from investor applications versus cash paid out in investor redemptions across the funds during the first half of 2020. The average net investor cash flow declined from 19% of the funds’ net asset value in the last quarter of 2019 to 3% in the first quarter of 2020, before a moderate recovery to 6% in the second quarter of 2020. However, this deterioration had little to no negative impact on investor redemption opportunities or on the size and frequency of distributions paid to investors;
• there was no material decrease in the liquidity of fund assets over the first half of 2020. For example, on average, the most liquid assets of the four mortgage funds actually increased from 4.0% of their funds’ asset value as at 30 June 2019 to 5.6% as at 30 June 2020. The funds’ least liquid assets decreased on average from 80.7% of their funds’ asset value as at 30 June 2019 to 68.6% as at 30 June 2020;
• most of the funds’ responsible entities introduced enhanced liquidity monitoring in March 2020, then eased back on this over the following quarter; 
• the responsible entities’ liquidity frameworks were generally adequate. All funds had multiple ways available to manage investor liquidity, such as the right to suspend or stagger redemptions, to charge and adjust redemption fees and to borrow money to pay redemptions;
• overall, liquidity risks and redemption rights were appropriately disclosed to investors;
• responsible entities reported a mixed but not severe impact on fund revenues as a result of COVID-19.

ASIC’s findings are consistent with feedback from industry associations about their members’ experiences of the COVID-19 impacted market. The associations also noted that their members had been monitoring investor flows and asset liquidity to ensure that they could meet investors’ redemption rights.

ASIC Deputy Chair Karen Chester said, ‘Overall, the responsible entities we reviewed well managed the liquidity challenges and market disruption of COVID-19. As the economic situation improves through 2021, responsible entities should continue to carefully manage the liquidity risks associated with their funds.’

‘We will continue to monitor liquidity management by responsible entities and may take compliance or other action where we find misconduct,’ said Ms Chester.

ASIC previously reminded responsible entities of their obligation to manage liquidity through monitoring investor redemption and application levels, and that they actively review their funds’ redemption terms against the liquidity of their assets.

Responsible entities should also ensure that their websites accurately represent the reliability of redemptions and distributions (refer 20-218MR).

For guidance on the management of liquidity and other risks, liquidity-related investor disclosure and liquidity related statements in marketing materials, responsible entities should refer to:

• Regulatory Guide 259 Risk management systems of responsible entities
• Regulatory Guide 168 Product Disclosure Statements (and other disclosure obligations
• Regulatory Guide 234 Advertising financial products and services (including credit): Good practice guidance

Background

This review was part of ASIC’s broader response to the initial disruption and uncertainty of COVID-19 on financial markets. ASIC sought to understand the nature and significance of any investor liquidity challenges faced by a selection of retail funds with relatively illiquid assets.

ASIC examined the availability of liquidity monitoring and management tools, how responsible entities used these tools, the adequacy of their liquidity risk management frameworks, and the adequacy of their disclosure around investor liquidity risk and redemption rights generally. 

The review covered publicly available material such as product disclosure statements, financial statements, websites and marketing material as well as material produced under compulsory notices such as liquidity framework documents and data on member flow, the liquidity and value of fund assets, distribution payments, and on actions taken by responsible entities to manage liquidity.