The Financial Conduct Authority’s announcement that it will launch another consultation into open-ended property funds smacks of “deja vu” and has left investors questioning why the regulator continues to talk instead of springing into action.
In a webinar presentation hosted by the Investment Association on Wednsesday interim chief executive Chris Woolard (pictured) announced the City watchdog would be consulting with the funds industry later this summer on whether daily dealing property funds were fit for purpose.
Though Woolard said that overall the asset management industry had showed “considerable resilience in the face of volatile market conditions” during the coronavirus pandemic he noted that open-ended property funds had once again run into trouble.
A raft of funds in the IA UK Direct Property sector were forced to suspend dealing the week the UK went into lockdown after they were hit by valuation uncertainties due to the coronavirus market turmoil.
Months later all but one fund, the BMO Property Growth and Income fund, remain shuttered.
“While suspension is in the best interest of investors, this crisis, like the aftermath of the Brexit referendum, shows the difficulty for these funds of maintaining a promise of daily liquidity to investors when their assets are inherently illiquid,” Woolard said.
“There has been considerable discussion about how to ensure redemption arrangements offer a fair deal to those remaining in the fund as well as those who wish to exit,” Woolard continued. “We will look to consult later this summer, in a genuinely open way, on whether long-term investor interests would be better served by finding a way in which these funds could safely transition to a structure in which liquidity promises to investors are better aligned with the liquidity of fund assets.”
Change can’t come soon enough
Willis Owen head of personal investing Adrian Lowcock applauded the move as a “vital step forward which will help to rebuild trust in the retail funds industry”. Lowcock said the issue of putting illiquid investments into daily dealing funds has been a “growing problem”.
“The events in the last twelve months have made it all too clear that something needs to be done, and it is a real step forward that the FCA is talking so openly about ensuring these open-ended property funds are converted into better structures,” he said.
“For investors, this change will provide a much more suitable investment for them, and change can’t come soon enough.”
History repeating itself
But others said the move smacked of “deja vu” and questioned why the regulator had not addressed the problem of illiquid holdings in open-ended property vehicles sooner.
On the news of another consultation, Fairview Investing consultant Ben Yearsley said: “Again? That’s all they do. Surely, they should just do something rather than just talk and consult.”
“It conjurs up a sense of déjà vu,” agreed Tilney managing director Jason Hollands.
“This something that was looked at in the wake of the post-EU referendum suspensions, resulting in greater sign posting and with the rules changed in 2019 to require funds to suspend if there was material uncertainty over the pricing of 20% or more of their assets. That is basically what has happen recently; in the view of independent valuers, price discovery was unsurprisingly poor in the midst of a major economic crisis.”
The issues surrounding illiquid holdings in open-ended funds came to the fore last year with the suspension of the Woodford Equity Income fund and the subsequent gating of the £2.4bn M&G Property Portfolio in December.
The FCA and the Bank of England had been planning to address the liquidity mismatch of certain illiquid assets in daily-dealing funds earlier this year, but the probe was put on ice following the outbreak of the coronavirus.
Hollands notes the IA has previously offered up proposals for a new fund structure that would accommodate illiquid, long-term assets like property, infrastructure and private equity and trades less frequently.
“While this would better enable funds to prepare to meet sizeable redemptions and potential ease the requirements for cash buffers, this type of structure would not necessarily address points in time when there is material uncertainty over valuations as we have seen in recent months,” he said.
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“It’s important to say that while listed property investment companies have remained open for dealing, lack of clarity around NAVs is still an issue, and so while investors can exit their holdings, it is at their own risk as to whether the pricing is fair or not.”
