Investment Freeze

Over the past couple of weeks, we have seen several Fund Managers put a halt on paying out redemptions.  For one of these funds, there was an unusual situation in that they chose to only suspend redemptions for investors who held “C” class units.  This was effectively a subclass for those investors with more than $1 million dollars invested in the fund.  What wasn’t reported was the fact that it was this class of units, which the major investment platforms custodial pooled investments were invested in.  Many of these people had less than $20,000 invested in the fund but were still unable to access their funds. 

Why should some investors, whom invariably used experienced qualified fee charging advisers, effectively be penalised by comparison to those investors who had made investments into the same underlying fund through, for example, a commission or trail based “tied agent”? The answer lies in the trust deed, a document seldom read by advisers and investors alike.  If a trust deed allows it, then it can legitimately happen.  Imagine the uproar if for example the banking industry could favour some depositors over others with regard to the security of their bank term deposits.  Fortunately this form of investor discrimination is not allowed by the Reserve Bank of New Zealand.

It is a real sign of the times, when a run on funds has to be stopped.  Other than a flight to the so called safety of a bank, good quality investments are being hammered by nervous investors.  In one situation there were no problems with the fund.  No defaults have occurred, and the lending is conservative.  What the manager, in this case AXA, was endeavouring to do was to stop a run on the fund by investors.  The fund is comprised largely of three to five year term mortgages, with no lending over 66% of the value of the security.  The mortgages either need to mature, or investors deposit more monies into the fund in order to be able to redeem investor funds.  In normal market conditions there are seldom any liquidity issues.  In fact over the past couple of years, it has often been the reverse situation where additional funds could not be accepted as there were insufficient good quality mortgages available that met the manager’s stringent requirements. 

Why is it that there is a perception of safety at the bank? Most of the banks have had to make large write-downs, and sure up their balance sheets by issuing more debt.  They have tended to lend to very high loan to valuation ratios.  We have falling property values and customers are having increasing difficulty in meeting their debt repayment obligations.  If banks were normal businesses, few would lend their life savings to them! The only logical answer it seems is that there is the perception that the New Zealand and Australian governments would not let one of the major banks fall over.  The same could not be said of building societies, credit unions, or cooperatives that operate in New Zealand.  Some of this group have collapsed before.

Relatively soon, all issuers of more than $10M of debt will need to be rated by investment rating agencies.  Investment rating agencies have recently come under fire again.  This invariably happens when a rating has just been given or reconfirmed a matter of weeks before a company runs into financial trouble.  A recent example of this was with Hanover, when ratings agency Fitch had just reconfirmed their rating, promptly suspended payments to investors.  Around the world, financial intuitions, many of them household names in their home countries have had their credit ratings downgraded.  This is not surprising as many of them have lost billions of dollars.  Some have successfully managed to introduce new capital through public offerings.  Some have tried and only succeeded because the underwriters have been forced to take up most of the offer. 

Unfortunately, it is unlikely that we have seen the end of problems within the financial sector all around the world.  It may well take several years for the world to recover.  It is really like taking a long drive and striking bad road works which slow us down for a while.  But don’t we just love it when the new road is finished and it is smooth driving? Hopefully we will all have something to look forward to.