FCA rules introduced this week calling for up to 180-day notice periods on open-ended direct property could be a “death knell” for the sector due to complications it creates for retail intermediaries.
The FCA is seeking feedback on a new notice period of between 90 and 180 days, according to a consultation published on Monday morning. Feeder funds would also have to abide by the new notice period.
The FCA said its proposals should make property funds higher quality investments but that there may be some clients where the long notice periods don’t meet their requirements.
Fairview Investing consultant Ben Yearsley reckons the FCA will go for a 180-day notice period.
The M&G Property Portfolio was not able to sure up enough liquidity within 90 days of its December 2019 suspension to reopen, Yearsley says. “That shows you there’s no point in looking at 90 days, you’ve had a real life example. It’s 180 days minimum.”
Portfolio Adviser contacted the asset managers offering the largest retail property funds for a response to the FCA proposals. Janus Henderson said the consultation would prompt a “long-needed” debate, while M&G, the only other fund house to respond, said it would be reading the consultation “carefully” and participating in the consultation.
Investors have until 3 November to submit feedback to the FCA.
Notice period creates complications for rebalancing model portfolios
GBI2 managing director Graham Bentley says the rules would cause problems for most professional investors and argues it could be the “death knell” for the sector.
Bentley reckons the majority of retail money in property funds are held via model portfolios.
“These model portfolios are auto rebalanced for the most part. A client would have elected to have that rebalance every six months or whatever frequency they suggest.
“But the problem with a three-month or a six-month notice period is that the price isn’t calculated until the day of redemption. Therefore you won’t know how much of the property fund needs to be sold when you’re giving your notice.
“Rather than establishing a prediction model making a guess about what the price of the property fund might be, most of them are going to say ‘what’s my alternative?’.”
FCA proposals could drive more investors towards investment trusts
Yearsley reckons the FCA proposals will probably push more professional investors into investment trusts, but he points out they come with more risk.
He does not use open-ended funds with direct exposure to property. “I think open-ended funds investing in Reits is probably the best structure.”
The benefit of the FCA proposals is that it could result in more fully invested property funds with cash allocations around 10%, he says. But it would still not be enough to entice him back to the fund structure having switched away in 2019.
Reits mixed with gilts behave similarly to property without the liquidity risk, says Bentley.
EQ Investors chief investment strategist Kasim Zafar says investment trusts can be problematic for some platforms used by model portfolios but says this is a technical problem that can be solved “rather than a fundamental mismatch of investment characteristics”.
But the FCA proposals would also leave model portfolios struggling with open-ended funds.
“Managing bespoke client portfolios of investments with different liquidity characteristics is no problem at all,” says Zafar. “However, for model portfolios often it is possible to only move at the pace of the slowest settlement time scale. From that perspective, longer notice than even a few days become problematic.”
Hawksmoor doesn’t invest in any funds with lock-up periods via its multi-asset products, says head of fund management Ben Conway. “It’s not because we think they’re a bad idea, it’s because we’re offering our own clients the ability to take their money out when they want it.”
Tilney funds set to see little impact from FCA proposals
Tilney head of multi-asset portfolios Ben Seager-Scott admits he may be different to many of his peers in expecting little impact if the FCA proposals come into force.
That’s because physical property makes up a small proportion of Tilney’s fund-of-funds and the wealth manager views it as a long-term strategic asset, which it very rarely trades around, says Seager-Scott.
The Tilney Balanced Portfolio has 3.9% in property split between the M&G Property Portfolio and Janus Henderson UK Property.
“Given the less liquid nature of the funds and the associated costs, I don’t think these are funds that suitable for frequent trading and we have long believed that if you might need to liquidate them in less than a couple of years, you probably shouldn’t be holding them as strategic assets,” he says.
Nevertheless, he would prefer a 90-day notice period rather than 180 days, to allow finer control over individual positioning. He also reckons the notice period could be more challenging for model portfolios.
Conway says he would still find a small allocation problematic for portfolios.
“It’s the thin edge of the wedge. When clients need their money back and when you need liquidity, is always the worst time.
“What if a big chunk of your clients wanted their money back at the same time because something awful was going on in the world. If you can’t touch 5% of your money, you can still meet those redemption requests for people to get their money back. But what are you left with? That 5% of your portfolio is now 10% or 20%.”
Holden & Partners currently allocates to property via both closed-ended and open-ended vehicles but is reviewing its open-ended property allocation in light of the negative outlook in certain parts of the sector.
Traditionally, the London-based firm avoids funds with long notice periods but it holds a couple that trade weekly, says investment director Paul Dennis.
“Introducing a 90-day notice period would certainly provide us with an extra layer of due diligence to carry out not to mention ensuring that it is the correct thing for our clients,” says Dennis.
