July’s property fund freeze has sparked renewed debate over the future of daily dealing portfolios after Aberdeen chief executive Martin Gilbert said he favoured an overhaul for “non-liquid” funds but suggested change must be led by regulators.
After a week which brought more evidence that the commercial property sector is stabilising, attention has turned to the longer term implications.
Asset management chief executives presenting interim results last week were quizzed by analysts over the potential repercussions of last month’s fund suspensions. Mr Gilbert, head of a business whose property arm suffered £1.5bn of outflows in the second quarter, said regulatory intervention would be the only way for change to happen.
“The regulator hopefully will tell the industry to go to weekly [or] monthly liquidity on non-liquid funds. It has to be regulator-led because no one in the industry is going to voluntarily go to monthly to make themselves non-competitive,” he said.
Andrew Formica, chief executive of Henderson – whose property fund is still suspended – told analysts that regulatory intervention on the asset class was possible, albeit only in the medium term.
Mr Gilbert’s comments echo findings from Fitch published last autumn, focusing on bond illiquidity risk. The ratings agency noted the potential commercial consequences of moving away from daily dealing would “stymie” providers’ appetite to adjust liquidity terms in the absence of regulatory intervention.
Some fund buyers, however, have shown signs of warming to this idea, and urged asset managers to take the initiative. Louise Babin, portfolio manager at Charles Stanley, said fund managers should “lead the way” in reforming dealing practices.
James Calder, head of research at City Asset Management, added: “As a fund buyer, do you end up in a situation where you get a choice of funds with different liquidity profiles? The worst case scenario would be to ban retail investors from these funds.”
FCA chief executive Andrew Bailey has already said property funds’ structure will need to be reviewed.
Any attempt to introduce similar moves for less liquid areas of other asset classes, however, would likely be more difficult for fund selectors to stomach given how integral a role the likes of high-yield bond funds now play in many portfolios.
A shift away from daily dealing for any type of open-ended fund would also, in effect, make permanent the kind of administrative issues now being faced by platforms attempting to deal with suspended property funds.
The Lang Cat consultancy’s Michael Barrett said: “It would be very clunky, hence the need to clearly communicate to advisers and their clients what’s going on.”
Ms Babin added: “Each platform is going to have different issues with a move to weekly dealing. Some will be back-office related and others will be more related to portfolio rebalancing and withdrawals. The best thing platforms can do [is] consolidate and then invest heavily in their underlying systems.”
Reassuring signs for real estate funds
A month on from a welter of retail property fund suspensions, and the commercial real estate market appears to be functioning more healthily. M&G said it had been able to sell assets at pre-referendum prices, L&G twice reduced the fair value adjustment on its still-open fund last week, while Kames Capital said its fund, which has also avoided suspension, was now seeing inflows.
Gated funds’ boards are scheduled to review the suspensions every 28 days, but portfolios may not rush to reopen.
Aviva Investors’ fund will remain closed this week, while Andrew Formica hinted Henderson’s portfolio would wait until its cash balance – which dipped below 10 per cent at the start of July – was between 20 and 30 per cent.
