Property price swings shows need to ‘reassess risk’

Property price swings shows need to ‘reassess risk’

Hawksmoor Investment Management’s Jim Wood-Smith has called for an overhaul of how risk is calculated for property funds, after three groups swung the price of their portfolios.

Last week Investment Adviser revealed that Henderson and M&G moved their UK property funds away from bid pricing, with Standard Life Investments following suit. All three effectively cut returns by 5-6 per cent for redeeming investors.

The shifts come after three consecutive months of net outflows for the Investment Association’s (IA) Property sector and six weeks before the referendum on the UK’s EU membership, which has concerned some investors.

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Fund selectors have warned more investors may redeem assets from property portfolios after the trio swung prices.

Ben Yearsley, investment director at Wealth Club, said the firms might have one eye on the upcoming EU referendum, but he noted: “It just makes people think: ‘It may be a bit of a weird market for the next six weeks, so let’s withdraw some cash now and sit on the sidelines and see what happens’.”

Selectors believed it was almost inevitable for further price swings from other open-ended bricks and mortar property funds.

These concerns led Mr Wood-Smith, Hawksmoor’s chief investment officer and head of research, to suggest “an overhaul” of how the industry quantified risk. He noted that, following the trio’s move, the focus would be on “the dangers of everyone else switching to bid pricing, and all the low-risk clients with big weightings in commercial property”.

But Mr Wood-Smith said: “This leads into [the idea of] risk – why is it that 99.99 per cent of risk assessment is either historic or expected volatility?

“Surely the chances of being switched to bid pricing, or even being locked in for six months, ought to figure, too?”

Mr Wood-Smith warned that the need for simplicity and clarity had led investors to rely on a constricted range of metrics.

“At the last count, we take 19 factors into consideration in assessing the risk of any holding, the problem being that most of these are subjective and everyone wants a quick and easy statistic,” he said.

“So say goodbye to common sense and hard work, and hello to ‘Mr Historic Vol’.”

However, Darius McDermott, managing director of ratings agency FundCalibre, said the risk of price swings and being gated in property funds was “very transparent” and that the property cycle was well known.

“Anyone who remembers 2008 will know these are possibilities. It’s part of the illiquid nature of the asset class.”

Mr McDermott said long-term investors would be unaffected by the change, because the price may well swing back before they divest their positions.

“The risk is in not understanding the illiquid nature. What Henderson, M&G and anyone that follows suit have realised is that they have to protect remaining unitholders,” he added.

Meanwhile Morningstar has sold out of property from its active managed portfolios range in the UK. Simon Molica, co-manager of the range, said the team had concluded greater returns could be found elsewhere, “especially... when factoring in the liquidity risk posed by daily-dealing property funds”.