Redemption Pressure in a Fund with Unlisted Assets
An open-ended fund with RM 1.2 billion NAV invests 25% in unlisted Malaysian companies, 15% in cash and the rest in listed equities, and its investors may redeem daily. Its deed permits a 10% monthly redemption gate and suspension with trustee approval. In the first week of March, redemption requests reach 18% of NAV as a large distributor exits. Cash covers only 15% of NAV, and the unlisted holdings would take months to sell at a fair price. The investment team proposes selling the most liquid listed holdings to meet redemptions, leaving the remaining investors concentrated in unlisted assets. The distributor says it will escalate to the regulator if it is not paid in full. Subscription flows have stopped. The trustee wants a recommendation by tomorrow.
1. Evaluate the investment team's proposal to sell listed holdings to meet redemptions.
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The proposal is unfair and risky. Selling the liquid listed holdings first leaves the remaining investors holding a concentrated unlisted portfolio that may be harder to value and sell; the exiting distributor receives cash at a NAV that may not reflect a liquidity discount. That is liquidity migration: the fund's risk profile changes for those who stay. The manager should use the deed's 10% monthly gate, pro-rating all redemption requests, and use available cash first. If the gate is insufficient, consider suspension and a side-pocket or instalment redemption only if the deed and trustee permit. Any sale of unlisted assets should be at fair value, not a fire sale. An anti-dilution levy can allocate exit costs to redeeming investors. The investment team's proposal should be rejected unless it is part of a broader, disclosed liquidity plan approved by the trustee.
2. What should you recommend to the trustee, and how should the distributor's threat be handled?
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Recommend to the trustee: activate the 10% gate immediately, pro-rate all requests on the same terms, and suspend if valuation of the unlisted holdings cannot be relied on. The distributor should be treated like every other investor; paying it in full would preference one holder and breach equal treatment. Explain the legal basis in the deed and the expected timetable. Document the decision, the trustee's approval and the communication. The distributor's threat to escalate is not a reason to change the analysis; if the regulator asks, the fund should show that it followed its deed, valued assets prudently and protected remaining investors. Also review whether the fund's liquidity profile and redemption terms were adequately disclosed, and report the event to the board. If suspension is used, set review dates and keep subscription and redemption handling consistent.