London – At least 76 European mutual funds suspended redemptions (“gated”) in March 2020 due to increased demand for withdrawals from investors concerned by financial market volatility amid the coronavirus pandemic, Fitch Ratings says. These funds, identified by Fitch from investment managers’ disclosures, had USD40 billion of assets under management.
Widespread gatings like this are rare and the only comparable examples were during the 2008 financial crisis and following the 2016 Brexit vote. The true extent of gating is even greater given that funds’ public disclosures are limited. The European Securities and Markets Authority said funds totalling EUR100 billion gated or applied other extraordinary liquidity measures in March.
The vast majority of gatings were driven by issues in pricing underlying securities across asset classes (see Jyske Fund Suspensions Highlight Open-End Fund Vulnerability). There was even one case of an exchange-traded fund suspending trading due to pricing issues. Several funds have reopened but some are liquidating.
We identified a high number of gatings in funds managed by Nordic managers, which may reflect higher disclosure standards for fund managers in that region. By fund domicile (rather than manager location), Luxembourg accounted for the largest share of gatings, which reflects the country’s market-leading position in Europe as a domicile for mutual funds.
Link to Infogram: European Mutual Fund Gatings
Several UK monthly- and quarterly-dealing commercial real estate funds and daily-dealing funds also gated (see Further UK Property Fund Redemption Suspensions Are Probable). In all cases, this was for valuation reasons, in contrast to the mass gatings of daily-dealing UK commercial real estate funds following the Brexit vote in 2016 in response to large redemptions. We believe that even if the daily-dealing funds that gated recently had managed to avoid valuation issues, they would have had to gate anyway to prevent a surge in outflows.
Link to Infogram: European Mutual Fund Gatings by Fund Type
We do not believe that the spate of fund gatings poses an immediate risk to the broader financial system. The volume of funds that have gated remains low compared with European mutual funds’ total assets under management, which were equivalent to about USD19 trillion at end-2019. However, the interconnectedness of the financial system means that fund gatings can spread, giving rise to contagion risk.
Further gating may be more prevalent among funds with material liquidity mismatches, which are compounded by large outflows within a short time. Mismatches are most acute in funds that invest in less-liquid assets while holding limited amounts of liquid assets. However, all European mutual funds operate with a degree of liquidity mismatch. The vast majority offer investors daily liquidity with settlement within two or three days.
Funds with higher exposures to lower-quality securities and those with exposure to sectors under greater stress are also more likely to gate, particularly when experiencing increased outflows.
Fitch does not rate any funds that have gated.