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FCA gives property funds stay of execution; A 90-year argument returns to the fore

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Propped up

The FCA’s long-awaited policy statement on funds investing in illiquid assets has given property portfolios some breathing room - but the horse may have already bolted as far as DFMs are concerned.

Delayed in the aftermath of the Woodford Equity Income suspension, new rules released this morning will see the creation of a new category of investment vehicle: ‘funds investing in inherently illiquid assets’. Nonetheless, some of the more arduous requirements proposed by the FCA’s original consultation paper have been scrapped.

FIIAs such as property funds will be subject to greater monitoring from the regulator, and required to outline their liquidity management strategies in more detail in prospectuses. Yet the FCA has backed away from clamping down on the amounts of cash such strategies hold. 

And while the watchdog has proceeded with a demand for these funds to suspend dealing if there’s uncertainty over the valuation of 20 per cent of their assets - as defined by an independent monitor - managers will be able to override this rule if they and the valuers agree that a suspension isn’t in investors’ best interests.

Both points raise the prospect of competing demands. The FCA is clear that suspensions are usually the way forward in times of material uncertainty. Asset managers conscious of taking a reputational hit may have a different view of their own fundholders’ priorities.

The regulator is also confident that the new 20 per cent rule will reduce the incentive for managers to hold large cash weightings - because doing so “would not enable a fund to continue dealing in uncertain market conditions”. 

Yet the industry pushback the FCA received on the proposals to limit cash buffers, coupled with the behaviour of property managers in the months since the 20 per cent rule was first proposed, doesn’t suggest fund firms are ready to turn their back on this strategy. 

From wealth managers’ perspective, changing times have already led them to refine their property exposure, largely at the expense of open-ended funds. But they will be conscious that new rules won’t end here. 

The watchdog is continuing to look at potential liquidity mismatches elsewhere in the fund universe. This morning it also floated the idea of obliging a fund’s largest investors to move away from daily dealing. That’s a point seemingly aimed at institutional investors rather than DFMs - but the biggest discretionaries may think it prudent to step up their use of segregated mandates in any case.

Cycling back

Value stocks’ rebound at the start of the month has meant renewed interest in one of the decade’s biggest investment debates - even though that share price surge has subsided just as quickly.

In truth, growth versus value questions had already grown stale for many: for all the advocates of value investing’s inevitable return, there are plenty who now think the investment style is dead or outmoded.

Many in the latter group think the tech revolution has effectively changed the game: the potential for digital disruption means that traditional value stock metrics, ie good valuations and a stable business model, are no longer a good barometer for predicting a company’s future success.

Add to that the prolonged outperformance for growth stocks - adjudged by many to be the longest in history - and the case for the disruptors looks clear. So it’s worth considering a contrary view, discussed this summer in a research paper by US firm O’Shaughnessy Asset Management.

In short, the research finds that value’s current struggles aren’t without precedent: growth was similarly dominant between 1926 and 1941. The common factor between then and now, according to OSAM, was the presence of a technological revolution, which back then took the form of the age of oil, cars and mass production.

The papers then suggests that value stocks returned to dominance once the benefits of that revolution began to be deployed across the economy. That helped ensure their overall outperformance over the past 90 years.

The nagging question, as ever, is if/when this will happen in the current era. The authors offer no firm conclusions. But their research may at least provide some hope for those who are sticking with the tenets of value investing.

Fragile China

Last Friday afternoon brought a headline that ended the week on a downer for big asset management firms. In an escalation of trade war tactics, the US is reportedly considering limiting investor flows into China. 

There are plenty of caveats to the idea. Officials have already denied some of the more significant points of the original story, such as the prospect of delisting Chinese firms from US indices. And any limits placed on inward investment look like they’d be limited to government pension funds rather than asset managers themselves.

But that’s not to say the story will have no impact on asset and wealth managers. There’s been plenty of noise about Chinese A-Shares’ growing role in regional benchmarks. But much more is to be done if onshore Chinese companies are to feature in UK investors’ portfolios in a meaningful way. An investment community already wary of Chinese governance issues and share price volatility will view the weekend’s headlines as one more reason to stay away.

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