What are fund gatings? Investing Explained

In this series, we break down the jargon and explain a popular investment term or theme. Here are the fund ports.

What does this mean?

A mutual fund can be shut down, suspended, or “closed” if there is a rush of withdrawals.

The closure should be temporary, but could last for months or even years.

The decision to gate is usually made because the value of the fund’s holdings has fallen sharply, and these holdings would have to be sold at a significant loss to meet redemptions. The positions can be illiquid, as is often the case with commercial real estate. In a depressed market it is difficult to immediately find a buyer for an office building, even at a low price.

This is why a number of such real estate funds closed in the wake of last September’s mini budget. This wasn’t the first time, as some were also shut down in the wake of the 2016 Brexit vote – and when the pandemic hit in 2020.

Any other reasons for a port?

A gate can also be ordered if the fund manager is at the center of a controversy.

Five Odey Asset Management funds have been frozen in response to a wave of redemptions sparked by news that the group is under investigation in the wake of allegations of sexual misconduct against founder Crispin Odey. These funds can be transferred to another manager.

Any other high-profile ports?

THE most notorious example is the closure of the flagship Woodford Equity Income Fund in the summer of 2019. The fund remains closed. Neil Woodford, the now-disgraced manager, had managed the fund recklessly and supported small, unlisted companies, causing its value to plummet. The watchdog Financial Conduct Authority (FCA) recently negotiated a recovery scheme whereby investors trapped in the fund could receive 77p in pounds for their losses, although this is less generous than it sounds. The Woodford scandal has soured many people’s perception of the entire fund management industry.

Can any type of fund be closed?

This is where it gets complicated. Only open-ended funds, such as mutual funds, will be foreclosed, as the managers may be forced to raise a lot of money quickly through sell-offs to cope with a flood of redemptions and may not want such a fire to organize. sale.

Mutual funds, on the other hand, are closed-ended. Since they are publicly traded companies, they cannot be closed. If you want to get out of a troubled trust, just get rid of your shares – although you may lose a lot of money in the process.

Exchange Traded Funds (ETFs) are also listed on exchanges, which should mean they should be liquid and thus not need to be closed if problems arise.

Is action planned for this?

The Woodford scandal sparked broader questions about fund liquidity. Mark Carney, then Governor of the Bank of England, argued that open-ended funds holding illiquid assets such as real estate were “based on a lie” as investors were given the impression that they had access to their money when they but wanted.

The FCA is conducting a review of the £11 trillion asset management industry – the custodians of our pensions and savings – which will focus on the liquidity issue.