Two fixed-income funds of TMBAM Eastspring were a catalyst igniting a major redemption in Thailand's mutual fund industry, to the point where the selling spree nearly sparked a liquidity crunch.
Net sales of Thai bonds by asset management companies totalled 35 billion baht on March 20 and 30.5 billion baht on March 27, according to data from the Thai Bond Market Association.
Local financial authorities, namely the Finance Ministry, the Bank of Thailand and the Securities and Exchange Commission, on March 22 issued urgent measures to address a liquidity problem in the mutual fund industry.
Before digging deeper into the saga behind the liquidity crunch, let's get to know the main culprits: the two fixed-income funds of TMBAM Eastspring.
TMB Ultra-Short Bond Fund (TMBUSB) and TMB Aggregate Bond Fund (TMBABF) are fixed-income funds with an investment strategy emphasising investment in deposits and short-term government and corporate bonds, both domestic and overseas. Investors can invest in these fund units with an initial sum of 1,000 baht.
A sense of superiority also surrounded these two funds because there was ample liquidity, allowing investors to invest throughout the working day and receive a return on investment by the next day via T+1 clearing and settlement.
"Their returns are 0.5% above the average return of the same category of funds in the mutual fund industry, thus attracting huge inflows into these two funds," said an industry source, speaking on condition of anonymity.
WealthMagik, an investment information website operated by Wealth Management System Ltd, reported that TMBUSB had assets under management (AUM) worth 80.66 billion baht as of March 11. The fund's investment returns stood at 1.79%, 1.5% and 2.18% in 2017, 2018 and 2019, respectively.
But a selling spree of fund units resulted in a huge tumble in the fund's AUM to 25.2 billion baht as of March 25.
A similar fate was seen with TMBABF. The fund's AUM stood at 71.06 billion baht on March 11, but value fell by about 32.86 billion to 38.2 billion baht on March 25.
In essence, a whopping 88.3 billion baht was lost during a span of 11 working days.
PANIC SETS IN
The sell-off momentum reached a point where fund managers were not able to set the timing of unit sales on time, due to a shortage of liquidity.
TMBAM Eastspring then had to resort to switching the clearing and settlement transaction system to T+5 instead of T+1. But this did not stop demand to cash out investment units.
What transpired next was a further selling spree after the switch was implemented. On March 20, the company issued a notice to investors about halting all transactions and switching funds.
The move sent a shock wave through investors and reached a fever pitch when a sell-off was seen in fixed-income funds of other companies as well.
The wildfire was quenched when financial authorities held a press conference on March 22, with the Bank of Thailand announcing a special facility to provide liquidity for mutual funds through commercial banks.
Commercial banks, which purchase investment units of high-quality money market funds or daily fixed-income funds that have been impacted by the decreased market liquidity, will be able to use the underlying unit trust as collateral for liquidity support from the special facility.
The central bank's preliminary estimate of eligible bond mutual funds is 1 trillion baht.
Additionally, the Thai Bankers' Association, Government Savings Bank, insurance providers and the Government Pension Fund have together set up a 70- to 100-billion-baht corporate bond stabilisation fund to invest in high-quality, newly issued bonds by corporates that cannot fully roll over maturing corporate bonds.
The Bank of Thailand on March 24 expanded the scope of a special credit facility to provide liquidity to mutual funds by allowing banks to repurchase all money market and daily fixed-income funds, but the central bank will repurchase only underlying assets that meet its requirements.
The central bank charges banks an interest rate based on the policy rate minus 50 basis points for repurchase transactions.
Vachira Arromdee, assistant governor for financial market operations, said commercial banks have started using this mechanism, but the quantity has not been substantial, signalling stability in Thailand's financial market and greater liquidity among mutual funds.
Despite greater market stability, TMBAM Eastspring on March 26 decided to suspend all transactions and redemptions of TMBUSB and TMBABF occurring on March 25 and terminate the two funds altogether.
TMBAM Eastspring chief executive Somjin Sornpaisarn said the key reasons for closing the two funds were heavy redemption and the need to safeguard panic-selling fears spilling over into other funds in the industry.
Since the majority of assets are invested in global fixed-income securities and bonds, the funds do not qualify for the central bank's liquidity assistance programme through commercial banks.
Investors will receive their money back within 90 days from March 25.
On March 27, the company terminated two other fixed-income funds -- TMB ThanaPlus Fund (TMBTHANAPLUS) and TMB Bond Fund (TMBBF) -- because there had been a heavy sell-off by unit holders to hold cash instead.
VIRAL OUTBREAK
One of the main factors prompting a risk-off mode across global financial markets is the Covid-19 pandemic. Global funds have since adjusted investment assets in their portfolios, with equities being one of the major casualties, and sought refuge in safe-haven counterparts.
The US Federal Reserve's aggressive monetary stimulus, cutting the benchmark interest rate to essentially zero, and a massive US$700-billion (around 23 trillion baht) quantitative easing programme to shelter the US economy from the effects of the viral outbreak have caused US treasury yields to fall sharply.
Units in TMBUSB and TMBABF, which invested heavily in foreign debt securities, were among those in the sell-off rush as investors wanted to reduce their risk exposure and hold cash against the backdrop of rising uncertainty and a lower-interest-rate outlook.
Mr Somjin addressed the issue via a YouTube video on the company's channel released on March 22, saying the problem did not stem from the investment quality of bonds, but rather a liquidity shortage on the back of a sell-off in bonds and stocks worldwide on coronavirus fears.
"We have invested in investment-grade debentures and are confident that these debentures can yield returns on both the principal and interest," Mr Somjin said. "There has never been a case of default in our investment."
But the announcement did not yield the desired effect, as the sell-off continued unabated, with a contagious effect spiralling into fixed-income funds of other asset management companies until the Bank of Thailand issued urgent measures to mitigate the liquidity crunch, according to a mutual fund industry source.
TMB Bank, which holds a 35% stake in TMBAM Eastspring, may not have been able to help inject liquidity during the sell-off because of its minority shareholder status, the source said.
Eastspring, the Asian asset management unit of Prudential Plc, finalised its 65% acquisition of TMB Asset Management from TMB Bank in October 2018.
As the latest suspension unfolded, TMB Bank came out to alleviate concerns, saying the bank has prepared a financial support programme to aid all mutual fund investors who hold TMBUSB and TMBABF units.
"This program is offered to all unit holders, covering both unit holders who are TMB customers and those who are not TMB customers," said TMB Bank chief executive Piti Tantakasem. "Therefore, if investors are in need of short-term liquidity, they can use their investment units as collateral for loans under this programme.
"TMBAM Eastspring will receive the proceeds from bonds that will reach maturity in the near term and the sales of the bond portfolios which consist of good investment-grade debt securities in the global market in order to pay back all unit holders."
INVEST CAUTIOUSLY
In hindsight, the person who sounded the alarm on the issue was former finance minister Thirachai Phuvanatnaranubala.
Using Facebook as a medium to voice his opinions and insights, Mr Thirachai urged the Finance Ministry and the central bank to be cautious regarding how TMBAM Eastspring's announcement to halt all transactions and switching investment units from TMBUSB and TMBABF on March 20 could be the tip of the iceberg for the Thai bond market.
Investment funds should disclose all investment assets to the public to build confidence and enhance transparency, Mr Thirachai said.
Such disclosure will also help mitigate panic selling and aid investors' decision-making as to whether to continue their investments or cash out of fund units, he said.
Some senior fund managers have also agreed with disclosing asset investment information to address panic selling and prevent a spill-over effect into other fixed-income funds.
Investing in the bond market can carry high risk, sometimes even higher than equity investment, because whenever a bond issuer defaults on repayment, investors may receive nothing in return.
Whether investing in fixed-income funds or any funds, investors should be aware of investment losses and liquidity or default risks that may occur during an economic slowdown.
An examination of the quality of asset portfolios put together by fund managers should also be taken into account, without blindly seeking a handsome return.
Fund managers should take a proactive stance on asset risk management because certain bonds may not have sufficient liquidity to sell when the market experiences a downtrend.
A liquidity crunch will ensue when sales cannot be executed, a potential recipe for panic selling and causing a tremor for the whole mutual fund industry and financial system.