Apr 26, 2012

It's a wonderful life

An interesting development in the life of the open-ended fund industry has hit the news today. 

In a press release published today (http://aox.ag/IGAUNd), SEB ImmoInvest is trying to achieve what none of its peers dared to try before. Move from a bank run situation back to a stabilized situation.  They are doing so by pointing on to shareholders the actual consequence of the run. 

The last sentence of the press release that quotes current SEB Asset Management CEO goes as follow: 

Barbara A. Knoflach: “We are asking our investors to consider the alternatives and, by staying invested, to commit to a future of the fund that could very well live up to its successful 23-year track record. The only chance to avoid the liquidation of the fund with all its consequences is not to take advantage of the exit offer.”

I would like to state clearly that this is a very brave move, and indeed, in my view, the only way to put any of the closed funds back into action. 

I have discussed in a previous post the interesting game theory issue that the closure of open-ended fund closure was posing (http://aox.ag/JpQleh). Any one who took the time to run this game would have figured out that this could only work out positively if players increased COOPERATION. This is exactly what SEB is trying to do. Again that is the right thing to do. 

However, I need to point out to one major weakness in the way this is done. There is a lack of clarity on the potential outcomes for each scenario (going concern or liquidation). For cooperation to work and players to see a benefit in cooperation they need to understand that cooperating in the game will lead them to a higher benefit (payout) that acting individually (which in this case end up in a run). While to some extend this is suggested by the press release (the liquidation of the fund AND ALL ITS CONSEQUENCES) it is not explicitly said that a run will probably end up in a much lower payout… To the contrary its insist on the quality of the underlying portfolio as an argument to keep the fund running.  If holders believe that they will get the same value in liquidation than in a going concern, than the cooperation will simply not work. 

I do not know any real life example of any thing like this being done before on such a scale (but would be interested if anyone have any knowledge of this). I can however recall James Steward managing to save its bank with 2.000 dollars in the 1946 It’s a wonderful life movie. Looking back at the scene of the bank run might be a good idea, to understand how he got people to cooperate… http://aox.ag/Ijy0Rn

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