Fund investors get the sub-prime jitters

The decision by BNP Paribas Investment Partners to temporarily suspend its three funds that have exposure to the US sub-prime market was made purely to preserve the best interest of the fund shareholders, stressed Vincent Camerlynck, global head of distribution at the French firm. The move, aimed at preventing nervous investors from pulling out cash, can also be interpreted as an attempt made by the institution to avoid incurring serious losses while hoping to ride the storm. Although funds and companies are affected by the sub-prime lending crisis in the US, the resolution to freeze the European funds – Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia – has concerned investors and analysts. Mr Camerlynck explained that the action was initially misunderstood, as investors’ money in the funds was wrongly confused with the bank’s own money. This negatively affected the company’s share price. “BNP Paribas as a company has minimum exposure to the US sub-prime market,” reiterated Mr Camerlynck. The size of the three funds had decreased to ?1.6bn from around ?2bn at the end of July. Most of this was due to clients pulling out, but it was also down to widening spreads, said Mr Camerlynck. “We decided to take this temporary measure only when we felt that there was an acceleration in the weakness in the market, less and less liquidity and that further redemptions would be made at a price that we did not consider fair to all shareholders.” The three funds have an average rating of AA, explained Mr Camerlynck. Mr Camerlynck said they did not think their decision would trigger such a reaction. “I think it just shows how nervous the market place is and how much it is driven by sentiment rather than the fundamentals,” he said, adding that the funds will be restored as soon as liquidity in the market place will enable to calculate a fair NAV. Risks of a repeat of the crash of 2001 are mitigated by low market valuations, said Hans-Juergen Delp, director of private client investment strategy at Commerzbank. “I don’t think that this specific US-related problem will turn around the current scenario of stable growth, good earning prospects and relatively low valuations,” he said. “Risk awareness is rising, spreads are widening and there are difficulties in providing the supply of credits. But on the other hand, companies are maintaining enough liquidity, the central banks are reacting quickly and a weakening US-economy is overcompensated by an earlier than expected rate cuts and dynamic economic growth from southeast-Asia.” The money market funds that Commerzbank has in their clients’ accounts only have an exposure of 2 to 3 per cent to the sub-prime mortgage sector and there have not been any overreactions in their client base, said Mr Delp. Other players have a more gloomy outlook. Michael Brune, bond fund manager at Oppenheim KAG said: “The situation in the ABS [asset-backed securities] segments remains difficult as a lack of liquidity is still pushing down offer prices.” Mr Brune recommended cleints remain invested and selectively add investments depending on their risk profile. A pure ABS fund managed by Oppenheim KAG for Austrian Hypo KAG was recently frozen for liquidity issues. Unlike the BNP Paribas funds, the securities were exclusively European.

Camerlynck: market driven by sentiment