How management companies increase the liquidity of closed mutual funds

Closed-end real estate mutual investment funds (CLIF) are not dominant instruments in the portfolios of retail investors. And one of the limiting factors is the limited exit options from such investments. Therefore, to increase the attractiveness of such closed-end mutual funds, management companies are taking measures to increase their liquidity: from traditional ones – listing shares on the stock exchange or using the services of market makers, to exotic ones – exchanging shares for square meters.

Lively meters

In 2023, management companies actively expanded the range of retail closed-end real estate mutual funds. Currently, there are already three dozen of them, and four funds have been formed since the beginning of the year alone, and three more are in the process of formation. In the first half of the year alone, the assets of such funds increased by 21.2 billion rubles, to 114.5 billion rubles, according to data from the management company Parus Asset Management. In a year and a half, assets more than tripled. At the same time, the main influx of funds provided operating closed-end mutual funds of commercial real estate under the management of the Criminal Code of the Federal Tax Service.

However, closed-end mutual funds remain niche and are included in the line-up of only a few companies, many times inferior to the more common retail funds (open mutual funds and BPIFs).

According to Investfunds, the total number of closed-end mutual funds as of October 20 was 385, and the total volume of assets reached 1.23 trillion rubles.

One of the factors limiting the interest of unqualified investors in closed-end mutual funds is the long-term nature of such investments. Typically, such funds are created for five to seven years, although there are also longer-term funds (for 10–15 years). It is possible to exit such investments only in a limited number of cases.

Unlike shares of open-end and exchange-traded mutual funds, investment shares of closed-end mutual funds cannot be sold at any time to a management company, therefore the liquidity of such shares is relatively low, notes Dmitry Osipov, CEO of Veles Trust Management Company.

Hard restrictions

The management company is obliged to redeem the shares upon termination of the fund’s operation. In addition, shareholders who disagree with the decision of the general meeting to approve changes to the rules of the fund can present shares for redemption. In particular, these include cases of transfer of the fund to another management company, extension of the term of the management agreement, and additional issue of shares. However, such events occur quite rarely.

If they need to leave the closed-end mutual fund, their owners will have to look for another investor who has agreed to buy the shares.

“The owner of the units can do this through a broker – under a purchase and sale agreement or through an over-the-counter transaction,” notes Nikolai Antipov, director of the center for working with institutional and corporate clients of Alfa Capital Management Company. Moreover, in the case of a closed-end mutual fund for qualified investors, both parties to the transaction must have the appropriate status, he points out.

Organized exit

To increase the liquidity of shares, some management companies offer shares for organized trading. Currently, according to the Moscow Exchange, shares of 12 rental real estate funds are available to investors. “Such a step certainly opens up additional opportunities for investors. But it is worth understanding that a closed-end mutual fund is still a long-term investment instrument,” notes Vladimir Stolnikov, investment director of Tethys Capital Management Company.

Trading shares on the stock exchange does not guarantee high liquidity, since not all of them have regular transactions.

General Director of the Management Company of the Financial Supervision Fund Ekaterina Chernykh draws attention to the fact that liquidity is available primarily in funds with a large number of shareholders and assets. Regular (every quarter) income payments have a positive effect on liquidity.

“If all the above conditions are met, then the secondary circulation of shares of such a fund will live on its own,” notes Ms. Chernykh. The number of transactions per day for individual closed-end mutual funds can be in the tens or even hundreds, but the trading volume rarely exceeds several million rubles.

Partnership approach

In some funds, to maintain liquidity, there is a market maker who, in accordance with the agreement concluded with the management company, assumes obligations to maintain prices, demand and supply of shares. “Theoretically, in order to provide the market with liquidity, a market maker can be held for over-the-counter transactions, but in this case, additional costs arise that investors will bear,” notes Vladimir Stolnikov.

Other schemes are also used to increase liquidity. In particular, Alfa Capital, in partnership with the Samolet group, launched a closed-end mutual fund focused on investing in residential real estate. To reduce investors’ risks, the development group guarantees a minimum yield of 9% in a separate agreement. In addition, according to the terms of the partnership with the management company, at certain periods in the future, shares of the closed mutual fund can be exchanged for square meters in the group’s residential complexes.

As the management company clarified, it will be possible to exercise the right of exchange two and four years after the formation of the fund (each window will last two months). As Dmitry Osipov notes, both options increase the liquidity of the fund. However, questions remain: how will the exchange take place, how will the shares and apartments for exchange be valued?

Vitaly Gaidaev