BlackRock is advocating a flexible approach or “toolkit” that would allow fund managers, fund boards, and regulators to react in the best interests of shareholders should they be faced with a spike in redemptions or other extraordinary circumstance.
“There's a lot of different tools that can be in the toolkit,” BlackRock Vice Chairman Barbara Novick said at the Paris Europlace International Financial Forum on Monday. “We think the broader the toolkit, the more flexibility to maneuver in scenarios that we don't know how to define today because we haven't seen them.”
In a March 25 letter to the Financial Stability Oversight Council, BlackRock outlined several such tools For example, in-kind redemptions, where feasible, are a unique method for allocating transaction costs to redeeming investors – particularly when those costs are imposed by a large redemption by a single, institutional investor.
Liquidity risk management is an integral part of running a mutual fund, Novick said on Monday. "A typical fund will have some combination of U.S. treasuries or other sovereigns, cash, a credit line that they can draw down, and might have interfund lending available," she said. "There's a lot of different sources of cash if it's simply to meet a short term spike in redemptions. That is good for liquidity risk management within a fund. The securities themselves also obviously throw of a lot of cash in terms of coupons and maturities."
Fund boards should also have the discretion to consider including a gate in the structure of a fund. This discretion to include out of the money gates in fund structures is already allowed under the UCITS regulation in Europe and has been included in UCITS structures without any discernable market impact.
“In general, we believe gates would be most helpful if they are sufficiently OTM such that investors’ ability to redeem on a daily basis is preserved under normal market and fund conditions,” said the letter.
Novick noted that in Europe, UCITS have the ability to put down a gate if they experience a 10% redemption in a single day.
The recent example of outflows from Pimco’s Total Return Strategy following the resignation announcement of lead portfolio manager Bill Gross is a good example of the ability to transition large amounts of assets from one manager to another without market disruption and also demonstrates the large number of competitors in the industry, according to BlackRock’s FSOC letter.
Despite this, fixed income markets, including related derivative instruments, continued to function in an orderly manner during this period of relatively low market liquidity.
“Every day you're reading a story about how there's no liquidity coming from the Street, and as a result of Bill Gross leaving Pimco, $100 billion of fixed income left that one manager and in in an environment where there’s ‘no trading on fixed income,’ that money went somewhere and it seemed to go fairly seamlessly,” said Novick.
The standard transition management practice for OTC instruments is for the legacy manager to close positions and the new manager to open desired positions concurrently. The recent experience with the Pimco Total Return Strategy was instructive in this regard.
“In our experience with separate accounts that were transferred from Pimco to BlackRock, all OTC derivatives positions were unwound by Pimco during this time period for cash and re-executed by BlackRock, where necessary, and in line with the investment strategy that we agreed to with the client,” said the letter.
Featured image by robert/Dollar Photo Club
