Multi-assetJul 15 2016

Fund managers split on property fund suspension spill over

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Fund managers split on property fund suspension spill over

The suspension of several large property funds has triggered fears of contagion to other investments, but fund managers have mixed views on whether the issue is likely to spill over into multi-asset offerings.

Last week, eight asset managers halted trading in their commercial real estate funds after seeing a surge in retail investors asking to withdraw their money following the UK’s shock vote to leave the European Union.

Some providers have felt the knock-on effect of property fund suspensions, with the likes of Prudential, for example, having to stall trading in six of its life and pension property funds, all of which invested in Aviva and M&G real estate offerings, which themselves suspended trading.

Earlier this week, Alan Beaney, chief executive of RC Brown Investments, told Investment Adviser the pause to trading in property funds would be an “administrative nightmare” for model portfolios.

But fund managers in the multi-asset and multi-manager space are split over whether the panic around property funds is likely to seep into their more diverse investment vehicles.

David Coombs, head of multi-asset at Rathbone Investment Management, said many “traditional” asset allocation approaches, often deemed to be ‘low risk’ portfolios, carry significant weightings to property.

He said where funds have seen falls in value, investors requiring regular income from their portfolio might have to rethink their exposure to risk and how this income can be generated.

There is no accounting for hot money and sentiment-driven exits. David Coombs

“Generally speaking, there is no accounting for hot money and sentiment-driven exits, so it’s difficult to say whether investors will pull out of multi-asset funds with holdings in property.

“Investors in property, be it through multi-asset funds or single strategy funds, should be taking a long-term view when approaching this asset class,” Mr Coombs said, adding this is probably a “healthy correction” after years of upward revaluations.

Mr Coombs, who manages four multi-asset portfolios, sold all of his holdings in open-ended property funds earlier this year, opting for real estate investment trusts instead.

“We were worried about a deterioration in the quality of underlying assets, as many open-ended funds were in receipt of significant capital inflows, which they had to put to work in an increasingly expensive market.

“While we expect some depreciation in the net asset value across the broader property trust market, the wider discounts do afford us a greater margin of error.”

Nick Peters, who manages the £240m Fidelity Multi Asset Adventurous fund, said he has not seen any evidence of the liquidity issues spilling over into any of his other investments.

Like Mr Coombs, he said he deliberately invests in investment trusts.

“We might see some impact on the value of our REITs exposure around UK domestic concerns, particularly if property funds are now forced to sell holdings.”

Mr Peters said, however, he has recently sold some of his property trust holdings, adding this was mainly because REITs have experienced a very strong run.

Tony Yarrow, founder of Wise Investments and manager of the £53m TB Wise Income fund, said he is not worried the suspension of property funds will trickle into multi-asset offerings.

The fund currently holds around 8.4 per cent of its assets in UK commercial property trusts, including Picton Property.

He said the dividend yield is a major attraction of the trust, and said the yield is higher than that offered by the recently suspended M&G unit trust.

“M&G’s yield is lower because it has bought more expensive, lower-yielding properties, has higher management charges, has suffered from cash-drag on performance, and can’t borrow money.”

M&G did not respond to a request for comment the time of publication.

By comparison, Mr Yarrow said Picton is under no pressure to sell properties into a falling market in order to meet investors’ demands for cash.

“However, the price of the shares has fallen sharply over the past few days, as investors scramble to reduce their exposure to the UK commercial property sector.

“Our challenge, then, is not how to reduce our exposure, but when and by how much to increase it.”

Peter Lowman, chief investment officer at Investment Quorum, said: “Understandably, these situations can create a domino effect.

“With the increase of multi-asset funds over the past few years, we are now faced with clients having exposure in commercial property through multi-asset funds, as well as directly through a commercial property product.

By selling multi-asset funds because of the property dilemma, you could be throwing the baby out with the bath water. Peter Lowman

“Clients still have the option to sell to ensure that they are not overweight commercial property, which can then have a snowball as investors pull out of multi-asset funds.

But Mr Lowman said this would be “another unhelpful state of affairs”, adding many multi-asset funds have excellent asset allocations outside of property.

“By selling multi-asset funds because of the property dilemma, you could be throwing the baby out with the bath water.”

katherine.denham@ft.com