New Zealand: Contingency planning in an uncertain world – what can fund managers do?

Last Updated: 8 May 2013
Article by Lloyd Kavanagh and Miko Bradford

This is the second article in a series by Lloyd Kavanagh and Miko Bradford about the implications of the continuing euro-crisis for different types of New Zealand businesses.

It remains a volatile time for investors into Europe. First it was Greece, Spain, Italy and Portugal, and now Cyprus is the latest eurozone nation to have required a bail-out.

Cyprus' banking crisis was triggered by the write-down of Greek government debt. In turn, part of the Cyprus bail-out plan involves a good bank/bad bank restructuring which sees deposits under EUR100,000 protected, and bad balances over that amount subject to a 60% "haircut" with 37.5% of deposits over EUR100,000 converted into Class A shares and an additional 22.5% of deposits over EUR100,000 held as a buffer for possible conversion in the future. A further 30% of deposits over EUR100,000 will be temporarily frozen as interest bearing but non withdrawable deposits. Constraints on Euro capital flows in and out of Cyprus have also been imposed.

Cyprus accepted the bail-out conditions after a parliamentary vote on 30 April 2013 that passed by two votes. Cyprus appears to be committed to remaining in the Euro, though a former Cypriot central bank president has said it would be better off leaving and rumours circulate that an exit may be considered. Meanwhile speculation continues as to whether other nations in the PIIGS group may find the austerity programmes required too much of them and seek a managed exit from the Euro.

The potential for any of these events should cause investment managers of either European funds or funds which have significant indirect exposure to Europe to look at the following areas:

  • Fund structure flexibility - is it sufficiently flexible to allow the fund manager to react quickly and decisively to a significant market event – contingency planning is key.
  • Underlying asset ownership and quality – do investors have a proprietary claim or merely a contractual right to underlying securities? How may the underlying investments be impacted?
  • Public offer document disclosure – have the risks been adequately disclosed, in relation to increased volatility or other impacts resulting from a possible euro break up require disclosure.

These issues will be familiar to New Zealand managers from other contexts, for example, the impact of the recent global financial crisis on NZ mortgage funds and finance companies, but may not have been considered before in relation to overseas investments.

Fund structure flexibility

Issues to consider include:

  • Valuation methodology – are valuation processes sufficiently flexible to respond to potential changes? This would particularly be an issue where investments change their fundamental nature, or currency. Is there a fall-back mechanism if market prices cannot be obtained? Also would the fund manager or the trustee be responsible for determining the valuation? Where managed funds have direct investments that could be affected, valuation procedures should be carefully scrutinised to ensure they are sufficiently robust.
  • Changes in the nature of investments, and illiquidity – does the trust deed and the statement of investment policy and objectives (SIPO) permit continued holding of altered securities, eg equity received on a conversion of debt securities or of securities re-denominated in a different currency – or will it require immediate disposal? Do the trust deed and the SIPO permit this kind of reclassification? Has this been communicated to investors?
  • Redemption obligations – following a significant market event, fund managers may face logistical and liquidity issues resulting from an increased volume of redemption requests of increased value. Fund managers should therefore consider whether the trust deed includes flexibility to use gates (which enable fund managers to restrict the amount of redemptions permitted on a specific redemption date and allow redemption requests not granted to be deferred), pay in-kind or suspend redemptions/redemption payments? – do fund managers have the ability to establish side pockets to hold illiquid assets?
  • Hedging – managers may wish to hedge the currency and interest rate risks inherent in fund portfolios. Where existing derivatives contracts are in place fund managers should review existing contracts to ensure adequate protection is provided in the case of a partial or complete break up of the euro – for example, are they able to terminate the transaction due to a force majeure event – what happens if the currency in which the underlying asset is denominated changes?
  • Investor consent – to the extent any changes are required to the SIPO or trust deed, fund managers should consider whether the consent of investors is required. Even if consent is not strictly required, fund managers should consider whether communication with investors is appropriate.

Asset ownership and quality

Issues to consider include:

  • Custody - how the underlying investments are held may affect the outcome. Does the fund have a proprietary (ie ownership) interest in the underlying asset, or merely a contractual right to delivery against an intermediary institution such as a custodian. This distinction can be critical in the event of the insolvency of the intermediary, when a proprietary claim may give a priority over other creditors, but a contractual claim may not or may be subject to a haircut.
  • Government bonds – debt issued by Governments of highly-indebted eurozone countries is more susceptible to write down or the introduction of collective action provisions because it is often issued under the governing law of the relevant government. Bank deposits may similarly be governed by local law. This may make them more vulnerable to a domestic restructuring. For example, private creditors holding Greek government debt were forced to accept lower interest rates and a more than 50 per cent write down on the face value of their assets.
  • Corporate or bank bonds – Eurobonds are often issued under English or another foreign law. That may provide a degree of insulation from a domestic law restructuring. Fund managers should consider undertaking due diligence as to whether an instruments of this type invested in contain "euro" definitions, and appropriate governing law, jurisdiction and place of payment provisions. They should also consider the jurisdiction of incorporation of the issuer and any guarantors.
  • European equities – a euro break up and the associated market trauma would have a clear impact on the value of European equities.
  • Capital controls – these may mean that even if assets are able to be sold, it is not easy to extract the proceeds from the relevant jurisdiction.
  • New Zealand and international equities (excluding Europe) – where Europe is a significant trading partner of non-European businesses, those non-European businesses may still be significantly impacted by a euro break up. Fund managers should carefully diligence the level of exposure the businesses or instruments in which they invest have to the euro generally and heavily indebted euro nations in particular.

Public offer document disclosure

It is unlawful for a registered prospectus to be distributed by an issuer in New Zealand if it is false or misleading in a material particular by reason of failing to refer, or give proper emphasis, to adverse circumstances. An investment statement must describe the nature of the returns including key factors that determine the returns. It must also include a brief description of the principal risks that a subscriber may not receive the returns described.

The key question for a fund is whether its investment strategy could be adversely affected by a full or partial break up of the euro, a sovereign ratings downgrade or the general market disruption that could result from any of those events. Volatility has almost become the norm for any fund investing in instruments or businesses tied closely to the euro or Europe (either directly in the case of European funds or indirectly through trading exposures).

In describing disclosure requirements, managers should consider:

  • have any changes been made to the SIPO which warrant disclosure
  • currency impacts – how would a full or partial euro break up impact investments
  • credit ratings of relevant investments – how would either sovereign or corporate ratings downgrades impact the fund? Are there ratings requirements in the SIPO? What is the fund obliged to do if downgrades occur?

In considering the risks and their impact on returns, fund managers should also consider describing how any such risks are being mitigated by the fund and the fund's strategy for managing what has become inevitable volatility.


In a world where financial market volatility is the new norm yet investors seek reliable returns on their investments, fund managers should carefully consider the implications of significant market events like a full or partial euro break up for their funds. From the terms of the SIPO to the impact on asset quality and disclosure to investors, it is appropriate to reconsider the tools that could be required to manage the challenges of this new environment and how this message is communicated to investors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions