I recently read about the freezing up of the US$788 million Third Avenue Focused Credit Fund in the US. The mutual fund that was meant to provide small-time investors with easy access to their cash has now been closed and redemptions have been blocked. I have invested, through a platform with a global insurer, into a number of funds around the world. How can I protect myself from something similar happening to my investments? GJ, Dubai
Expert one:
Julian Vydelingum, chartered financial planner at Killik Offshore
In the US, a handful of fixed-income funds have recently stopped investors from withdrawing their holdings after suffering significant redemptions in the past year. The Third Avenue Focused Credit Fund, which had about $3.5 billion in assets in the summer of 2014, suffered almost $1bn in redemptions from January to November 2015, according to Morningstar. This caused the fund to stop clients redeeming their money so the underlying holdings in the fund could be liquidated in an orderly fashion and prevent a fire sale of the remaining assets at prices that could disadvantage other investors in the fund. Many expatriate investors have also suffered suspension periods on redemptions when investing in funds where the underlying asset was less liquid.
When selecting investments, GJ should consider:
• Liquidity – the ability to readily sell off assets if needed for the approximate price they are valued at. GJ should look for mutual funds that trade daily or instruments such as Exchange Traded Funds (ETFs) that are tradable in real time on an exchange, as these are less likely to hold illiquid assets than funds that only trade weekly or monthly.
• The underlying assets in the fund – some asset classes previously deemed too illiquid or risky for retail investors are being packaged up into investment funds and marketed to individual investors who may not be able to discern the true nature of the underlying asset. For example, some property funds may appear low-risk, but the underlying buildings are not easy to sell.
• Who regulates the fund – In countries such as the United Kingdom, there are strict regulations on whom funds can be marketed to, with clear definitions of retail and sophisticated investors. That is not necessarily the case in other jurisdictions; ensure you understand the risks outlined.
Expert two:
Sam Instone, chief executive of AES International
Investment always involves exposure to an element of risk. The main types include market risk, liquidity risk, credit risk, inflation risk, longevity risk and foreign exchange risk. The example you mention is liquidity risk – the risk of being unable to sell your investments at a fair price when you want to. The traditional way to mitigate this is through diversification by purchasing lots of investments such as bonds, equity and property funds, so if one investment freezes the rest should be OK. Understanding your investment time horizon may also help avoid investments that are at risk of becoming frozen, as cash is a far more liquid asset than irregularly traded funds or direct property.
The world has changed, and the advent of ETFs means retail investors can now access extremely highly diversified funds that are traded on stock exchanges, much like stocks. Not only are these index funds much more liquid than conventional mutual funds, but they are available with far lower charges and often achieve a better performance. Given that you reside in a zero-tax environment, I question if you need to pay the much higher charges associated with investing through a global insurance company as opposed to through a custodian or directly with the investment houses.
Next Money Clinic:
With all the doom and gloom about global markets, property and the oil price, I have investment paralysis. Is now the time to hang on to cash and sit the storm out until the dust settles? BC, Abu Dhabi
Every three weeks The National features a reader's personal finance problem. If you have an issue or would like to suggest a solution for another reader's concern, write to pf@thenational.ae.
The advice provided in our columns does not constitute legal advice and is provided for information only. Readers are encouraged to seek appropriate independent legal advice.
pf@thenational.ae
Follow us on Twitter @TheNationalPF
