Open-ended Property Funds Could Be A 'car Crash', Warn Fund Selectors

In the days following the Brexit vote, Standard Life halted dealing in its now £2.1bn UK Real Estate fund, with Aviva, M&G, Henderson (now Janus Henderson) and others following suit in the ensuing weeks with their respective property funds, as investors rushed to withdraw their money on fears of falling valuations in UK commercial property.

Many also added a fair value adjustment to their portfolios as direct property is not subject to daily pricing, taking into account falling property prices.

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LGIM introduced a 15% discount on its £3.2bn UK Property fund and Kames' discounted the £708m Property Income fund by 10%, while other groups slashed theirs by around 5%.

All gated funds had reopened by the end of the year and the Investment Association's UK Direct Property sector has returned an average of 12.7% since 1 January 2017 according to FE.

However, the recent introduction of pricing adjustment plans among property funds as Brexit discussions reached a crescendo has caused some to question whether the sector is anticipating another meltdown.

Long-term planning

Ahead of the 12 April Brexit deadline (now extended to October), Janus Henderson adjusted the pricing approach on its now £2.8bn Property fund from dual pricing on a quoted-spread basis to on a full-spread basis in March to "promote long-term investment", while Columbia Threadneedle did the same for its Property Authorised Investment fund just a week later.

The latter said its reasoning was to "simplify the pricing structure for the funds, improve transparency and provide greater clarity regarding buy and sell prices for investors".

Kevin Doran, managing director at AJ Bell, said whether other property funds follow suit remains to be seen but "history tells us that valuations in funds could move lower, prompting redemptions and possible changes in fund pricing, and ‘gating' in extreme circumstances."

He added: "As a product with an inherent liquidity mismatch baked in, we would not advocate holding property via open-ended funds until that problem goes away."

Luke Hyde-Smith, head of fund selection at Waverton Investment Management, agreed, stating he is more comfortable holding investment trusts in the group's Real Assets fund.

"In property, we are not happy with the open-ended structure," he said. "Not only are the majority of open-ended funds invested in the retail sector, which has its headwinds, but they cannot meet large investor redemptions in a daily dealing format.

"Many also have high cash levels so you are not even getting all the property exposure you want. As for the current climate, if we get a no-deal Brexit, open-ended funds are going to be a car crash."