Investors with money locked in commercial property funds should be compensated with a £140m cash injection by the fund groups after they made a “mockery” of fair treatment rules, an investment expert has argued.
Speaking to FTAdviser, Alan Miller, chief investment officer at SCM Direct, described the situation as a “scandal” because exiting investors were allowed to sell their holdings at materially inflated prices after Brexit, while investors left in the fund suffered a loss.
“The FCA needs to force the fund houses to pay compensation or they are making a mockery of the rules, particularly the most important rule, which is to treat customers fairly.
“If the FCA does not force these groups to do the right thing then it just sets a precedent for them to do the same thing again in the future. To do nothing is totally unjustified.”
Property funds have been in the spotlight over the past fortnight after Standard Life set the ball rolling by suspending its £2.7bn real estate fund on 4 July in response to increased outflows following the UK’s vote to leave the European Union.
There have been a string of property fund suspensions since then, as investor fear set in and thousands tried to pull their cash out of the vehicles, sparking concerns over the mis-match between the funds’ ability to trade on daily basis and the illiquidity of the underlying property investments.
Based on recent pricing adjustments and suspensions of eight major property funds, he said the fund houses could be forced to inject around £140m into their funds to compensate remaining shareholders after extra cash was “given away” to redeeming clients.
“After Brexit, it was crystal clear there was a serial mis-pricing of the funds,” he said, adding SCM warned the FCA about the issue on the 27 June.
Mr Miller said also said the FCA should have forced the fund houses to take action the day after the referendum, either by re-pricing the funds to reflect the reality of the property prices after the referendum, or by suspending them to give them time to get a proper external post-Brexit valuation.
“Why wasn’t the FCA getting them to make an adjustment?” he questioned, pointing out that prices for British Land dropped by 19 per cent and Land Securities by 16 per cent the morning after the referendum.
Mr Miller said it is likely investors who pulled out early might have seen the drop in property prices and therefore decided to take advantage of the “overvalued” funds by selling their shares.
He said the fund groups had a “bizarre” mindset where they didn’t want their fund to fall more than their competitors, and accused them of failing to behave in the interest of investors.
To do nothing is totally unjustified. Alan MillerResponding to Mr Miller’s comments, a spokeswoman for Standard Life Investments, said the company’s decision to make a value adjustment of 5 per cent to the underlying property assets of the UK Real Estate fund was made in the interests of treating customers fairly.
She said: “The suspension was requested to protect the interests of all investors in the fund and to avoid compromising investment returns from the range, mix and quality of assets within the portfolio.
“Approval for the suspension was received from Citibank Europe plc, in its capacity as depositary for the fund. The suspension will end as soon as practicable, and will be formally reviewed at least every 28 days.”
Legal & General Investment Management revalued its £2.5bn property fund on the 7 July as it looked to deter investors from withdrawing their money.
A spokeswoman for L&G said the fund remains open and the company is continuing to manage liquidity to ensure investors are able to invest or withdraw money.
“Acting in the interest of investors, LGIM’s approach has consistently been to price the funds in a way that most accurately reflects the underlying property values based on all available information.”
When Financial Adviser approached the other six fund houses for a response, they all declined to comment or did not respond in time for publication.
Mr Miller’s comments come as regulatory experts questioned whether imposing more regulation on property funds would prevent investors from panicking and demanding their investments back.
New chief executive of the FCA Andrew Bailey hinted that the redemption rules for open-ended property funds could be changed.
The FCA also declined to comment on Mr Miller’s views.
ADVISER VIEW
Ben Yearsley, investment director at the Wealth Club, disagreed with Mr Miller’s views, although he said he sympathised with his take on the situation.
“I think the fund groups have reacted to an ever-changing and challenging situation in the best way they can. They had big redemptions on the Friday, but no one could have known that was going to happen.”
Mr Yearsley said laying blame was unfair and unhelpful, and the focus should really be on whether property investments should be held in open-ended funds.
He said most of the property funds had a “conservative” level of liquidity, adding: “Who knows, when they start reopening the funds in two months time, what the price will be?”
katherine.denham@ft.com
