Asset owners tighten risk focus after fund house failures
Asset owners' appetite for illiquid assets has been tempered by several recent blowouts and prompted them to look more closely at fund houses' risk-management processes.
Asset owners are stepping up their scrutiny of asset managers in the wake of problems at Woodford Investment Management, H2O Asset Management and GAM, and now Noah Holdings too, say investment professionals in Asia.
European fund firms Woodford, H20, and GAM have recently seen a draw on their investments amid concerns over their ability to meet redemptions from some of their illiquid holdings.
And this week saw a new frontline open up as US-listed Chinese asset manager Noah Holdings came under fire due to its exposure to Rmb3.4 billion ($494.06 million) of supply-chain financing linked to Camsing International, whose founder was detained by police on suspicion of fraud.
Having disclosed this news on Monday, fanning concerns that these debt investments might default, Noah's stock price fell about 14% over the remainder of the week.
The company was the first Chinese asset manager to list its shares in New York, selling a narrative of catering to China’s ultra-high-net worth individuals. Through its unit Gopher Asset Management it sold a range of high yielding debt products, some reportedly offering annualised returns approaching 8% for 10-month periods – some five percentage points above similarly dated Chinese government paper.
On Friday, Noah told Chinese media that there was no risk of contagion following a review of its other products.
But coming on the back of a run of negative fund-firm news, that's done little to stop some asset owners getting a little jumpy about the private investments with little or no regulatory oversight that are made on their behalf.
As one fund manager at a European asset manager, who declined to be named, told AsianInvestor, all the clients in his Asia-focused fixed-income fund are now double-checking the fund's risk management, particularly when it came to liquidity, to ensure it can cope with any potential stress.
A second fund manager said some asset owners were increasingly also scrutinising the degree to which fund holdings are audited.
Another issue too in the wake of recent fund scandals is price discovery, especially where determined by entities that might be related to the bond issuer rather than through some kind of market-determined process.
YIELD PRESSURES
All this comes after a decade-plus period of low yields – in some cases, even negative yields –which has increasingly pushed otherwise risk-averse investors towards unlisted assets.
As too few good-quality publicly traded bonds are chased by too much easy money, squeezing returns to a minimum, so fund managers have increasingly turned to less liquid higher-yielding investments to beat their benchmarks.
As a result, some systemic tension appears to be building.
“Very low interest rates and very ample central bank liquidity masks the illiquidity of some assets,” Jon Allen, head of Asia-Pacific at Columbia Threadneedle Investment, said. “That is probably an underestimated risk.”
GOOD GOVERNANCE
So as institutional investors seek out private investments, they need to have governance structures that are appropriate for private investments and their liquidity profiles, he said.
Of course, some asset owners have tighter risk controls than others. Take a sovereign wealth fund at the top of the food chain such as Temasek Holdings.
“Every year we have a very healthy pipeline of things to look at but we only execute if we feel that investment will be good or not, the risk involved in it and whether it will be part of a portfolio that is constructed for long-term sustainable value,” said Dilhan Pillay, chief executive of its investment arm Temasek International.
However, “one size does not fit all,” warns Anne-Marie Fink, a portfolio strategist for alternative investments at State Street.
Illiquidity “forces a buy-and-hold approach” and institutions have to determine “how much illiquidity their institutions can handle from an operational perspective, as well as the performance of their various asset classes,” she said.
And given just how much capital is chasing yield even at current pricey levels it's likely that many investors have been less picky than others, creating potential systemic risks.
The Bank of England, for one, senses a potential crisis if left unchecked. In his parliamentary testimony on Wednesday, the central bank's governor Mark Carney noted an increase in open-to-redeem funds, for example. These manifestly promised a level of liquidity while holding illiquid underlying assets, which could create “a potential systemic issue” if investors viewed such investments as “not that different from having money in a bank.”
As a result, the Bank of England said it would team up with the UK’s Financial Conduct Authority to assess the mismatch in liquidity at funds with a view to minimising the "financial stability risks without compromising the supply of productive finance.”
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