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‘Nightmare’ for model portfolios after property setback

‘Nightmare’ for model portfolios after property setback

Intermediaries and model portfolio providers have been warned they face “big problems” in the wake of a disastrous week for open-ended UK property funds.

Six retail funds have suspended dealing to stem a run on assets, leaving £18bn shut off to redemptions.

Multi-asset funds and model portfolio services (MPS) holding these funds will face mark downs as a result, but industry worries centre on the logistical problems now facing MPS providers rather than the risk their portfolios will also be gated.

An “administrative nightmare” now looms as providers wrestle with how to rebalance and asset allocate.

Alan Beaney, chief executive of RC Brown Investments, said the suspensions will effectively mean the introduction of two-tier investment strategies.

“MPS [providers] have a big problem. They can’t sell what they’ve got and they can’t buy, so they can’t even rebalance – many new clients will go into cash. It causes a huge administration nightmare. You end up with two cohorts of clients,” he said.

Seven Investment Management co-founder Justin Urquhart Stewart added: “[Model portfolios] do have a problem. They can find an alternate asset class but that breaks up the asset allocation model, and that’s the discipline. So I’d imagine they would revert to cash holdings.”

Though gated funds’ values are likely to be marked down significantly, valuations for most will now be made on a weekly rather than a monthly basis, ensuring MPS providers are still able to price their own portfolios with a degree of accuracy.

Additional issues arise, however, in relation to platform-based model portfolios. In many cases, processes such as the allocation of new client capital are automated by platforms.

Old Mutual Wealth, Cofunds and FundsNetwork all said they had begun contacting those affected to explain their practices.

A spokesperson for Old Mutual Wealth said: “Any payments currently allocated to the suspended funds will be allocated to cash. [Users] can change the funds in [their] portfolio, or create a new portfolio and switch into it. The suspended funds will not be touched.”

The extent of the redemptions that prompted the suspensions was emphasised in comments provided by multi-asset managers to Investment Adviser.

Barings said its £155m Multi-Asset fund, which held 10 per cent of its assets in Henderson UK Property at the start of last month, had liquidated its entire position – but declined to confirm exact dates.

HSBC Global Asset Management’s £269m Open Global Property portfolio held 30 per cent in open-ended property funds at the end of May, but sold virtually all of this allocation in the week following the vote.

Stephen Peters, investment analyst at Charles Stanley, said he had been removing property exposure from the firm’s model portfolios in the last few months.

He acknowledged: “If a fund is suspended, that is a problem for us and other providers.”

Mr Beaney said: “It shows the weakness of the MPS system. There’s no easy solution.”