Property fund suspensions
This week a number of fund houses announced their property funds are temporarily suspended. This included property funds managed by L&G, Janus Henderson and Aberdeen Standard Investments, to name just a few.
What is a fund ‘suspension’?
When a fund applies a ‘suspension’, it effectively means no client transactions are allowed. Basically, you can neither invest into the fund, nor can you withdraw from the fund. The fund itself continues to run as normal and be actively managed in terms of buying and selling assets, trying to generate returns, etc.
Why have the fund houses applied these suspensions?
These decisions have been taken due to the current turbulent market conditions, which has meant the fund’s Independent Valuers are unable to accurately value the properties within the funds. As an investor, the last thing you would want is the fund manager selling holdings in a property below true market value or investing in a property above market value. It therefore makes sense that under these circumstances, the best course of action is to temporarily suspend dealing of the funds.
The other factor to consider is that failing to suspend a fund due to this issue could mean investors selling out may receive more than what their share of the underlying properties were really worth, at the detriment to those remaining invested.
Has this happened before?
Whilst not a common occurrence, from time to time property funds do apply suspensions. Usually however it is due to liquidity issues, rather than the current situation of being unable to value the properties within the funds. The reason being, that unlike a traditional equity fund where assets can be bought and sold on a daily basis, the assets of a property fund take much longer to sell. Where a lot of investors are trying to draw their money out at the same time, the fund may struggle to meet investor demands due to not have enough readily available ‘cash’ to withdraw. Therefore, a property fund will apply a temporary ‘suspension’ until it has been able to sell holdings in order to free up additional cash.
Will the value of my investments be impacted?
Possibly in the short term as the independent valuers are no longer confident in the valuations previously placed on the properties due to the recent / temporary collapse in demand following the COVID-19 situation.
So why invest in property funds?
Property funds can add a lot of value to a diversified portfolio. Typically, they tend to have low volatility, generate positive & steady returns, and offer low short-term correlation to other asset classes.
Property values are typically quite ‘sticky’, with the price of the underlying assets changing infrequently, whilst the income generated through rent is usually always fixed or increasing at set intervals (e.g. to match annual inflation). This results in the level of volatility from a direct property fund being very low when compared to equities and bonds, with property returns being insulated from wider stock market movements.
Is it only property funds that get suspended?
Whilst property funds are the most commonly impacted funds in terms of suspensions, it is potentially possible for any type of fund to be suspended. The most common reason, as mentioned above is due to a lack of liquidity. Such an example was the well-publicised situation with Neil Woodfords fund, where a large number of investors wanted access to their money at the same time.
What is the regulator doing about this?
In 2019, the FCA announced new rules forcing the suspension of a fund where there was material uncertainty over pricing of at least 20 per cent of the assets. Although these rules do not officially due to come into force until September 2020, it appears they have effectively been adopted early by fund houses in the face of such major economic turmoil.
What happens next?
When funds are suspended like this, it is usually for an initial 28 day period. At the end of that period the fund houses will then complete to decide whether to continue for a further period, or whether to remove the suspension. Thus, as is the case with much of the world right now (and not necessarily the preferred answer), it is simply a case of sitting and waiting.