Money Managers Concerned About Decline In Liquidity

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Professional money managers expressing concern that a decline in liquidity could exacerbate losses for fund investors during a market decline.

While legislation after the Y 2008 crisis has made banks safer, the risk has been transferred to investment funds that function as a “shadow system.”

Participants should hold enough cash to avoid having to sell fund holdings during a panic.

“Long used to the inevitability of capital gains, investors and have not been tested during a stretch of time when prices go down,” money manager Bill Gross, 71 anni, wrote in his recent outlook. “It’s then that liquidity will be tested.”

Mr. Gross, the manager of the $1.5-M Janus Global Unconstrained Fund, joins money managers including BlackRock Inc. (:BLK) Larry Fink, who warned that the retreat of banks as counter-parties could create severe volatility. Regulators are looking to ensure that a sudden exit (panic) out of funds will not result in a downward price spiral that threatens the financial system.

A destabilizing event could precipitate a wave of selling that could feed on itself, Mr. Gross wrote. Possible triggers for a selloff could include a deterioration in Greece, which could lead to concerns about other European countries; monetary policy steps that drive bond prices lower and the dollar higher; and a crisis in emerging markets or .

Pimco has disputed the notion that mutual funds are subject to client “runs” in times of market stress.

In a 29 May letter to the Financial Stability Board, which is working on guidelines for regulating big asset managers, Pimco CEO Douglas Hodge said he was unaware of any historical example of a mutual fund that could not meet client redemption’s.

Mr. Gross said that regulators have “ample cause to wonder” about the risk of an investor run on funds. The obvious risk, he wrote, “is that all investors cannot fit through a narrow exit at the same time.”

To help manage liquidity, BlackRock, the world’s largest money manager, has increased the amount its mutual funds can collectively borrow to meet withdrawals to $2.1-B as of November from $500-M in early Y 2013, regulatory filings show. Goldman Sachs Group Inc (NYSE:GS). and Guggenheim Partners are among the firms that have also arranged new borrowing agreements or bolstered existing ones in the past year.

BlackRock is also seeking government clearance to set up an internal program in which mutual funds that get hit with client redemption’s could temporarily borrow money from sister funds that are flush with cash, according to a filing last week.

Pimco, facing record redemption’s after the departure of Mr. Gross, used a provision in the Investment Company Act of 1940 to sell about $18-B of assets held by the Pimco Total Return fund to other Pimco funds, a filing in May showed.

Mr. Gross, who used to run Pimco Total Return and built it into the world’s largest fund with $293-B in assets at its height in Y 2013, is now the manager of Janus Global Unconstrained Bond Fund. That fund lost 0.2% from the time Mr. Gross took it over on 6 October 2014 through 28 June 2015, trailing 58% of comparable funds, according to data from research firm Morningstar Inc. The $9-B Pimco Unconstrained Bond Fund gained 0.9, 72% ahead of rivals.

Stay tuned…

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