The investment industry has had its say on the news that the Financial Conduct Authority (FCA) is looking to introduce rules to improve the structure of open-ended property funds.
On 3 August 2020, the FCA opened a consultation for feedback on a notice period between 90 and 180 days.
Feeder funds would also have to abide by the rules.
Currently, property fund investors can buy and sell units very frequently, sometimes even daily.
Unappealing
Adrian Lowcock, head of personal investing at platform Willis Owen, said: “There is no doubt by putting a six-month notice on the funds they will become unappealing to many investors, especially in a time when investors are used to being able to access a growing range of investments with daily liquidity.
“Six months is a long time for any investment and the price you get 180 days later could be materially different from the one you expected.
“However, the notice period will help remove short-term investors and would make the asset class less volatile and less susceptible to sell-offs.
“There will be some disruption, but there are alternatives and the change should present an opportunity for investment trusts and exchange-traded funds (ETFs) to come up with a proposition that works.”
Eminently sensible
In the consultation, the UK regulator warned that the properties in which these open-ended funds are invested cannot be sold or bought at the same pace.
This results in a “liquidity mismatch”; and when too many people are redeeming their investments at the same time, fund managers need to halt dealings due to liquidity imbalances.
Property fund suspensions have been an increasing trend in the last few years, with one of the biggest examples being the M&G Property Portfolio, which stooped dealings in December 2019.
Ryan Hughes, head of active portfolios at AJ Bell, added: “The liquidity mismatch that can occur in open-ended funds has been in sharp focus since the Woodford debacle and property funds are where this problem most often rears its head.
“The FCA’s proposal to introduce a notice period for withdrawals from open-ended property funds is eminently sensible. It will ensure that property fund managers can manage their portfolios more effectively and give them time to sell properties in a controlled way in order to meet redemptions.”
Change perceptions
Hughes added: “Perhaps more importantly it should also change the way investors view property funds. Property should be seen as a long-term investment but daily trading on these funds has led to investors assuming they can get their money back whenever they want whereas in reality this has not been the case in many instances.
“Having a notice period of between 90 and 180 days should change this perception and means investors are less likely to get a nasty surprise when they want to withdraw their savings.
“Notice periods won’t call a halt to all property fund suspensions because in times of severe market stress property managers still might not be able to sell properties quickly enough and there will still be the requirement from 30 September this year to suspend funds when there is uncertainty over the values of more than 20% of the portfolio.
“However, it would give managers greater flexibility to meet redemption requests and should change investor’s perceptions of what to expect.”
Spare blushes
Despite seeing the positives of the change, some in the industry also questioned whether investors have anything to gain from this?
Dzmitry Lipski, head of funds research at Interactive Investor, said: “After so many property fund suspensions over the past four years, many property fund investors have seen their assets go into deep freeze.
“[The] proposals, with a notice period of up to 180 days, mean that investors will still effectively have to keep their assets on ice for up to six months.
“Proposals making this a norm, rather than an exception, might spare fund management groups a few blushes, but we question what investors have to gain by sacrificing daily liquidity, given that there is a good structure for investing in illiquid assets already in place – investment trusts.
“No structure is perfect, and the share price may still come under pressure in a distressed market, and discounts could widen. But on balance, we still prefer the closed-ended structure when it comes to less liquid assets as it gives instant access to investors’ money.”
