Seven Investment Management has sent a letter to investors in 19 of its funds setting out changes that will enable its investment team to up their exposure to money market funds (MMFs) and money market instruments.
Currently, the limit is set at 20%, but 7IM is looking to open up the remaining 80% of each fund by making changes to their prospectuses.
Per Financial Condust Authority regulations, investors must be given 60 days’ notice of the changes, which are set to come into effect on 29 July.
Vulnerable and a threat to financial stability
The timing of the letter, which is dated 27 May, is interesting given the FCA announced just three days previously that it is looking to shake up money market fund rules following the liquidity concerns that came to light amid the Covid-19 driven sell-off.
The March 2020 market shock “increased selling pressure, volatility and illiquidity”, the FCA said. “MMFs came under severe strain across major currencies, including in sterling, as investors quickly sought access to cash.”
Even though the danger has passed, the UK watchdog is concerned “that underlying vulnerability within MMFs and threats to financial stability remain”.
Had MMFs been forced to suspend, it “could have potentially had wide repercussions across the real economy and financial sector”, the FCA added. “It could have led to companies failing to make business critical payments, such as payroll, or to financial market participants being unable to meet margin calls, leading to the technical default of those institutions.
“While the shock itself did not originate in the financial system, there is evidence that certain structural features of MMFs amplified and reinforced the initial liquidity shock.”
‘Extraordinary market conditions’
Unsurprisingly, the rationale behind the changes outlined by 7IM can be traced back to March 2020, when the investment team said it “began to sell down the bonds held by our funds to cover obligations under futures contracts”.
Cash was used to improve the overall liquidity profile of the funds and “operational efficiencies”, the firm added.
As a result, the 20% liquid asset limit was exceeded in some funds. This was in breach of the prospectus, but leeway is given during “extraordinary market conditions”, which is a phrase that crops up repeatedly in the letter.
In Q1 2022, 7IM said it took the view that conditions had improved. “However, regrettably, the escalating Ukraine crisis has been causing new uncertainty in a major way, with the consequence that our view is that conditions remain extraordinary.”
7IM is looking to amend the investment policies of the 19 funds so that investment in money market funds and money market instruments “falls within the 80% of investable assets rather than being limited to 20% of the relevant fund overall, as is the case currently”.
This would enable the team “to continue to make full use of well-established efficient portfolio management techniques […] and for the best choice of the cover that needs to be held against futures positions”.
When asked what that means for the total exposure of the funds to MMFs, a spokesperson told Portfolio Adviser: “All our funds are managed against pre-determined risk profiles, with our investment risk team routinely and independently checking that the investment team are not taking too little or too much risk in the funds.
“Furthermore, our futures and corresponding money market exposure is monitored by compliance.”
The 19 funds are:
|7IM Investment Funds (all sub-funds, excl. 7IM Sustainable Balance Fund)||7IM Specialist Funds||7IM Opportunity Funds (all sub-funds, excl. 7IM Real Return Fund)|
|7IM AAP Adventurous Fund||7IM Personal Injury Fund||7IM Pathbuilder 1 Fund|
|7IM AAP Moderately Adventurous Fund||7IM Pathbuilder 2 Fund|
|7IM AAP Balanced Fund||7IM Pathbuilder 3 Fund|
|7IM AAP Income Fund||7IM Pathbuilder 4 Fund|
|7IM AAP Moderately Cautious Fund||7IM Select Adventurous Fund|
|7IM Adventurous Fund||7IM Select Moderately Adventurous Fund|
|7IM Moderately Adventurous Fund||7IM Select Balanced Fund|
|7IM Balanced Fund||7IM Select Moderately Cautious Fund|
|7IM Moderately Cautious Fund|
|7IM Cautious Fund|
Cover for futures contracts
The wording is slightly different across the funds, but the effect will be the same.
As an example, looking specifically at the £50m 7IM Asset Allocated Passives (AAP) Income Fund, the changes to the prospectus, by paragraph, are as follows:
BEFORE: The Sub-Fund invests at least 80% of its assets in fixed interest and equity instruments that, for the most part, use passive strategies.
AFTER: The Sub-Fund invests directly and indirectly to achieve exposure of at least 80% to fixed interest and equity instruments. This exposure is, for the most part, obtained through passive strategies […] but may also be achieved through the use of futures contracts which require cover to be held (typically in the form of money market funds and money market instruments).
BEFORE: The other 20% of the Sub-Fund will be invested in liquid assets such as cash, deposits, money market funds and money market instruments, as well as warrants.
AFTER: The other 20% of the Sub-Fund will be invested in assets such as cash and deposits and may also include the use of money market funds and money market instruments for more general liquidity purposes. This is additional to the holding of such assets as cover for futures contracts as noted above.
One area that has not changed is the ability of the investment team to “temporarily invest up to 100% of its total assets in deposits, cash, near cash, treasury bills, government bonds or short-term money market instruments”.
The following paragraph has also been added to the updated prospectus: The Sub-Fund’s investments will be more focussed on income generating assets such as corporate debt securities but there will be an allocation to growth generating assets such as global equities.