Managers cop flak for closing funds

Managers closed their funds as they said they could not calculate accurate unit prices for assets that trade on US markets. However, some funds that didn't own US assets, or owned assets that were traded on markets other than the stock exchange were closed.

But by closing the funds managers were denying investors access to their capital.

In New Zealand FundSource executive chairman David van Schaardenburg and Credit Suisse First Boston vice president Peter Irwin have both criticised the practice.

"It is the role of fund managers to manage funds not to prescribe to investors how they should be behaving emotionally in times of crisis," Irwin says.

"Nor, is it their role to deny investors access to their capital, whether such access is logical, rational or a simply a reaction driven by panic.

"The rights of the individual must remain paramount."

Van Schaardenburg suggests advisers and investors should carefully consider how managers have acted in this situation when they go to invest money.

He says some managers closed all their funds, not just those which held US assets.

"The bottom line is that fund managers should seek to keep their funds open at all times," he says. "Some were a bit too quick to close their doors."

Van Schaardenburg doesn't accept the argument that managers can close funds in times of high volatility.

One of his concerns is that people are moving away from vehicles such as superannuation funds because of their lack of liquidity and locked-in investment periods. However, they are now finding that unit trust managers are denying them access to their money.

New Zealand managers are not alone in facing criticism. The issue has come up in other countries such as the United Kingdom. In that country the Financial Services Authority urged managers last week to keep funds open so people could trade.

Securities Commission chief executive John Farrell says there is a potential problem, however the commission has been so busy with other issues it hasn't had the time to devote to the issue.

The two points he makes are that the criteria for closing or suspending funds should be clearly pointed out to investors in the investment statement.

"This is quite an important point of disclosure," he says. "I think it has the potential to be a matter of concern."

His concern is concentrated by the increasing number of international funds being promoted in New Zealand.

Farrell says if the issue is of concern to investors offshore it is one here too.

Phillips Fox partner Rachel Taylor says from a legal point of view it is difficult to make generalisations about the merits of closing funds.

She says the answer to the question lies in the wording of each fund's trust deed.

"I don't think the decision to suspend is taken lightly," she says.

One of the reasons is that a suspension may have negative impacts on investors' perceptions.