Kames property fund suspension sparks chain reaction concerns

Coronavirus volatility throws up valuation challenges for illiquid assets in open-ended funds

Photo by dylan nolte on Unsplash
Photo by Dylan Nolte on Unsplash


Kames Capital has frozen its Property Income fund, becoming the first casualty of the coronavirus market turbulence and sparking concerns of a chain reaction of closures in the sector like the one following the Brexit vote.

Kames temporarily suspended dealing in its £585m property fund and feeder funds, managed by Richard Peacock and Karen Fox, at 12pm on 16 March after the “market turmoil” caused by the coronavirus made it difficult for its independent valuer CBRE to provide a true value of the fund’s underlying assets.

The suspension follows the gating of the M&G Property Portfolio in December, although that was blamed on Brexit and the fund’s high retail exposure.

FCA rule change means suspensions were inevitable

“It appears coronavirus has claimed its first fund suspension with the Kames Property Income fund suspending, once again highlighting the problem of shoe-horning an illiquid asset class into a daily dealing structure,” said AJ Bell head of active portfolios Ryan Hughes.  

Hughes said the FCA rule changes have made suspensions more likely during times of market turbulence when it is even tougher to value assets. The regulator’s stricter guidelines require non-Ucits retail funds to suspend where an independent valuer determines there is material uncertainty around the value of more than 20% of the fund’s assets. 

“At the end of February the fund was running with cash of around 11% but events have moved quickly in recent days making it difficult for independent valuers to make accurate valuations of the underlying properties,” he said.

“With M&G Property Portfolio having been suspended since December last year, it raises serious questions about whether we’ll see a chain-reaction effect and see other property funds suspending,” he continued.

“If one property fund is struggling to value their assets then I would expect more to be in the same boat,” agreed Willis Owen head of personal investing Adrian Lowcock.

Evidence mounting against suitability of daily dealing property funds

Kames Property Income was one of the few open-ended property funds able to stay open in the aftermath of the Brexit vote though it introduced a 10% pricing adjustment.

Although the recent Kames suspension was done on valuations grounds and not a result of being overwhelmed by outflows like in June 2016, Lowcock said it “adds more weight to the issue that property funds seem to be increasingly unsuitable for daily dealing open-ended funds”.

“The coronavirus crisis is causing volatility in asset prices and a rapid re-evaluation of the economic outlook which leads to reassessments of the value of assets,” he said.

“As such it will affect the whole property fund sector at some point or other. At least with investment trusts you have an exit option if you are willing to accept the price.”

Kames has said it will continue to regularly update investors with developments during the suspensions.