Many asset managers have suspended trading of their open-ended property funds due to material uncertainty about asset prices during the coronavirus lockdown.
Hopefully, this is a short-term measure. But let’s look at why it’s happened and the impact on investors.
WHY HAS TRADING BEEN SUSPENDED IN THESE FUNDS?
The reason given by asset managers for suspending trading in these funds is that the current lockdown situation has had made it impossible to put a proper valuation on these assets. These managers have stated they want to protect customers by ensuring they don’t make payments at a time when they’re unsure of the value of their underlying assets.
The inclusion by independent property valuers of a ‘market uncertainty’ clause in valuation reports has led to this. The fund suspension notices issued by asset managers have all cited the ‘market uncertainty’ clause as the trigger for their decision to suspend trading.
This comes as the FCA is due to implement rules that require a fund to suspend trading if material uncertainty applies to more than 20% of a fund’s immovable assets.
PROPERTY FUNDS THAT HAVE BEEN FROZEN
Aviva suspended trading in its £461m UK property fund that invests in a range of commercial properties including offices, high street shops and leisure facilities. The fund is regularly valued by an independent company and the price of buying shares determined by that valuation.
The advice given to Aviva was that there was too much uncertainty in its valuation, which meant the risk of investors buying or selling shares at a cost that didn’t reflect their true worth was too high.
Other companies that have suspended trading in these types of property funds include Aberdeen Standard Investments, BMO Global Asset Management (GAM), Janus Henderson, Kames Capital, Legal & General Investment Management, Columbia Threadneedle Investments, and Standard Life Investments.
ASSET MANAGERS HAVE WARNED INVESTORS THAT OTHER FUNDS COULD ALSO BE AFFECTED.
A spokesperson for Aberdeen Standard Investments commented: “Markets around the world have experienced huge disruption as COVID-19 spreads and trading in the UK property market is being severely impacted. We will aim to lift the suspension as soon as confidence returns to the market and there is more certainty regarding asset valuations.”
WHAT DOES THIS MEAN FOR INVESTORS?
Currently, over £10bn is locked in open-ended UK property funds as investors are banned from withdrawing their money.
However, asset managers have been quick to issue reassurance saying that the decision to suspend trading in these funds had been made to safeguard the interests of investors.
Patrick Connolly, a financial planner at Chase de Vere, said, “While the suspensions may be a concern for investors, they need to keep calm. Investors should have been aware of the liquidity risks in property, should only have a small proportion of their portfolio in property funds and, in recent weeks, the performance of open-ended property funds has stood up much better than property investment trusts and the stock market in general.”
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