Wealth firms face up to property price risks; Structured products spell trouble for fund holders
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Risk assets may have rallied, but DFMs have spent much of the quarter attempting to kick the tyres of their defensive positions. And when it comes to one particular asset class, assessing strategies’ exact worth is easier said than done.
Amid all the sell-offs and rebounds seen since March, open-ended property fund valuations have hardly moved. Needless to say, that's because the funds have suspended trading. And while few discretionaries will stick with the sector once the gates are lifted, it’s not as simple as just waiting it out.
There’s little prospect of the funds reopening any time soon - valuers’ have started to price some assets, but there’s still a long way to go until they can do likewise for entire portfolios. That's left wealth firms who hold the funds tasked with valuing the portfolios themselves in the interim.
That’s a tricky job, given many conventional benchmarks are at least partly dependent on the performance of the now-suspended funds – and therefore aren’t showing much of a drop. The alternative is to look at listed property investment trusts and Reits, some of whose share prices fell by as much as three quarters over the period.
Some holders will be waiting for benchmarks to catch up with reality, while others might grit their teeth and use Reit prices. So the choice of comparator used by wealth managers – if they are attempting to revalue these holdings at all – will have a significant impact on the value of their portfolios as a whole.
As Rathbones’ David Coombs points out, there are also questions for the risk-rating agencies who have previously deemed commercial property to be a relatively low-volatility asset. Open-ended funds are already off the agenda for selectors, but any reassessment here would have implications for DFMs who still hold closed-ended property vehicles, too.
Stress test
There are two reasons why allocators have been scrutinising their diversifiers more closely than usual of late. The first is renewed nervousness over the months ahead. The second is because drawdowns provide a litmus test for how those defensive assets actually function during a crisis.
In a similar vein, this year's sell-off provided an opportunity for certain fund structures to prove their resilience. ETFs, for instance, again confounded those who have long claimed their rise to prominence risks destabilising the financial system.
The sight of some products trading at notable discounts to NAVs did briefly raise alarm, but those shifts proved ephemeral. A report from the Investment Association published last week saw fund firms state that ETFs were “a key source of liquidity and price discovery during the crisis”. The Bank of England has itself noted that in the fixed income space, ETF share prices "incorporated new information more rapidly than the [NAVs] of assets held within their, and equivalent, funds".
But not all products have proven so useful. A different type of investment vehicle did prompt notable outflows at one asset manager in the first quarter.
Hidden in Gam’s Q1 statement a couple of months back was a note that billions of euros worth of outflows from its Star Credit Opportunities fund were triggered by “the mechanical rebalancing of client holdings invested via structured products issued by third parties”.
Little seen on UK shores, these products are more popular on the continent – and, clearly, their automatic sell disciplines can have particular consequences when it comes to fund flows. Selectors whose fund choices are also popular with European buyers should be aware of the risk that their fellow investors can now present.
Long road ahead
The Fed statement overnight confirms that it’s back on a ‘lower for longer’ path when it comes to interest rates. In case there was any doubt in investors’ minds, Jerome Powell went so far as to say he was “not even thinking about thinking about raising rates” in the subsequent press conference.
But while the central bank has done a fine job of soothing nerves over recent months, the gloomy outlook implied by the above has given investors more reason to pause for breath. Add to that the sight of virus infection rates ticking up again in reopened US states, and it’s little surprise that some of the froth has come off risk assets today. Having seen a huge run-up in the past two weeks alone, the likes of travel and leisure stocks are back under pressure.
Paradoxically, allocators who had been worried by the recent rally might be reassured by markets’ acknowledgement that an uncertain future lies ahead. But they will also realise the hard work may be only just beginning.
