Why Fund Managers Are Scared of Sudden Withdrawals  

When M&G Plc, a U.K. property fund, announced it was freezing withdrawals on Dec. 4, mom-and-pop real estate investors were introduced to a term that’s already caused pain elsewhere in European bond and equities markets: liquidity mismatch. It’s what happens when funds that promise unrestricted redemptions put money into assets that are hard to sell in a pinch. That contradiction led the head of the Bank of England to warn earlier this year that some funds were “built on a lie.” Some observers compare the situation to a bomb hidden in the markets, ticking away and set to go off come the next downturn.

For years, mom and pop investors have been pouring their money into mutual funds and exchange-traded products with the promise that they can get their money out anytime they want. At the same time, many funds that traditionally focused on liquid securities have been edging into more rarefied corners of the market to eke out returns in today’s world of low or negative interest rates -- a movement known as “style drift.” But many of those higher-yielding assets are in thin or quirky markets, making them potentially hard to trade. Real estate is perhaps the most illiquid asset of all, often taking months to unload.