ShareSoc has now submitted our response to the consultation by the FRC on “Illiquid Assets and Open-Ended Investment Funds”. This follows on from the problems experienced last year where property funds had to close to redemptions but it can affect other types of funds also such as private equity ones.
In summary after listening to a number of our members on this topic, we have chosen to say that although we would not be opposed to the banning of such funds entirely, we suggest the best way to ensure there are no problems in future is to ensure that very strong health warnings are given to investors who chose to invest in such funds. Obviously in the case of commercial property funds, there are a number of closed end funds (e.g. investment trusts) covering that sector so most investors should have very good reasons to choose open-ended ones instead.
You can read our full response here: Open-Ended-Funds which also contains a link to the FRC consultation document.
There were a couple of interesting articles related to this topic in the Financial Times recently. One reported that big UK property funds are hoarding cash – in several cases well over 20% of their assets. Presumably this is because of fears of a repeat of last year’s run on the real estate sector. Holding large amounts of cash obviously provides the liquidity to enable high requests for redemptions to be met and to counter market volatility, but it also reduces the returns from the fund in the longer term as cash typically yields less than property. It would be unusual for a real estate investment trust to hold that much in case, and often they are more than fully invested as they use gearing to improve returns.
Another article reported on the Association of Real Estate Funds (Aref) response to the aforementioned consultation. Their report called for a “comprehensive review” of the rules governing retail property funds as it was unclear what fund managers were allowed to do. A somewhat odd comment and the FRC consultation document clearly covers the matter in some detail already. But another suggestion made is that the problem could be resolved by having a range of different fund structures because most investors are not actually looking to “day trade”. So a range of products reflecting the different liquidity needs of investors might be offered.
Comment: An interesting idea but would it really be practical? It would also add confusing complexity to investors choice. Investors find it difficult to anticipate when they might want to sell, and some sales might be crystalised by the death or major financial/personal crisis of an investor. Would they be considered an exception, or just told it’s bad luck they chose to invest in a fund that requires six months or a year withdrawal notice – because that is how long it might take to dispose of commercial property? For private equity funds, it might take even longer to dispose of assets.
And would investors choose funds with lower returns in preference to others with higher returns? Which might be the result of them offering high liquidity at all times, and holding cash or other low return assets to enable the former to do so?
Behavioural responses to such scenarios could be complex.
Roger Lawson
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