For financial professionals only
The widespread suspension of Commercial Bricks and Mortar Property funds may feel like déjà vu, but the underlying reason for these suspensions is very different to the 2016 situation.
In the lead up to the Brexit referendum, negative sentiment of investors resulted in strong outflows in property. It was this rush to the door and the inability to meet redemptions that caused suspensions.
In contrast, the recent suspensions have been caused by an inability to accurately value enough of the underlying holdings. General fund flows into the sector had actually started to improve, particularly at the end of February when money was being pulled out of risk assets.
Additional liquidity measures from the FCA (announced in 2019 to take effect from September 2020) require a fund to suspend if there is uncertainty over the pricing of at least 20% of assets. With a number of independent valuers unable to accurately put a price on properties in the current climate, funds have chosen to comply early.
The Parmenion view
We are in constant contact with the Property funds used within our portfolios. The situation we’re in is unprecedented, with so much uncertainty around economic consequences of Covid-19, the inability to price accurately is not surprising.
The stock market volatility we are experiencing suggests equities are in a similar position. The difference is that equities have a live and public market to price, whereas Commercial Property does not.
It’s also important to separate these suspensions from the Woodford Investment Management situation which hit the headlines last year. A key issue with Woodford was a lack of governance, which enabled him to invest up to the allowable limit in illiquid assets. These limits were breached when there were significant outflows and the overall fund value went down.
With Property, the liquidity profile is fully known and funds have gone above and beyond their governance requirements.
Suspensions ultimately protect underlying investors, including those wanting to invest and those redeeming. If a fair price cannot be agreed, there can’t be a fair outcome for investors.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.