ING fund redemption suspensions in perspective

- Fritz J de Boer, CFP | NZIJ FINANCIAL SERVICES LIMITED


The funds concerned invest mainly in Collateralised Debt Obligations (CDOs) and Collateralised Loan Obligations (LDOs). These instruments have recently been subject to considerable market uncertainty and volatlity. 

The volatility was originally caused by the deterioration in the “sub-prime” market which lead to a tightening of lending standards. This led to a reduction in the availablity of money to borrow. This has been coined a “global credit crunch”.

While initially, only credit markets were affected, the magnitude of the problems saw the market volatility spread to the broader equity and property markets. This resulted in a lack of demand from investors (buyers) which in turn contributed to a downwards movement in the prices of credit products such as CDO’s and LDO’s. Increased speculation of a recession in the world’s largest economy, the United States, has further impacted the situation.

The result has been a drop in the value of the unit prices for the ING funds. This in itself is not a big deal, as we have also seen individual shares and managed equity funds drop in value. Overall this can be considered normal market volatility. So why then has it been necessary to suspend redemptions?

Unfortunately, as investors have become nervous they have chosen to redeem their holdings in the funds. The manager (in this case ING) normally holds part of the fund in cash to meet normal levels of redemptions. However, if redemption levels rise the manager is forced to sell some of the underlying assets to meet these redemptions. Because the market prices of the instruments in which the funds invest have fallen, the prices realised lock in losses. Selling large tranches of these assets at deflated prices to fund redemptions has the effect of penalising those investors who remain in the funds.

It is important to note that the decision to suspend redemptions was made by the trustee of the funds. The decision was made (quite correctly) to protect the interests of those investors who remained in the fund. This, after all, is why we have trustees; to protect the interests of unit holders.

For me, the biggest concern is that there were so many investors deciding to redeem their investments. What was their rationale?

I find it hard to believe that all those invested had the same investment objectives which led them to invest in the first place. If they had invested into these funds on the advice of advisers, were they given a good understanding of how these funds worked?

Of even bigger concern would be if they were exiting these funds on the advice of advisers. If that is the case, I suggest that perhaps those advisers did not understand the investments well themselves.

I have followed these funds closely over the past couple of years and have always been comfortable with them. The funds should be regarded as medium term (3 years plus) investments. The assets of the funds are very well diversified with over 6000 individual underlying securities. The majority of the securities held in the portfolio are individually rated by at least one of the major independent rating agencies – S&P, Moody’s or Fitch. The average credit rating is BBB- which represents “investment grade”. To date, despite market volatility the funds have experienced no defaults and income continues to be distributed to investors.

I am still very comfortable with these funds to the extent that I have been closely watching the market with the intention of investing further monies to take advantage of the depressed prices. Over time as some
 of the underlying securities mature and are repaid the unit price should return to par. Unfortunately, not only are redemptions suspended, but the funds have been closed to new investment. Depending on when suspensions are lifted the opportunity to profit from the current opportunity may well be lost.

My advice to clients prior to the suspension of redemptions was to remain in the fund. and in all likelihood this will still be my recommendation once suspensions are lifted.

For more information, please call Fritz de Boer on 0800 90 60 90, 04 499 3592 or email fritz@nzij.co.nz