The Bank of England is “actively working” with firms to deal with the impact the gating of property funds will have on multi-asset funds.
Mortgage Strategy sister title Fund Strategy understands The Bank of England will tackle any “second order effect” gating property funds might have on multi-asset funds and any others holding those property funds.
Fears have been raised about the risk of contagion from the closure of property funds, with multi-asset funds and model portfolios potentially facing liquidity issues due to their allocations to property funds.
Seneca Diversified Income fund manager Richard Parfect says: “There are clear ramifications for any multi-asset fund holding such vehicles. But then there may also be ramifications for other asset classes such as equities and bonds if these multi-asset funds receive redemptions and are forced to fund them from areas other than their gated property funds.”
Hargreaves Lansdown senior analyst Laith Khalaf says holding commercial property funds in multi-asset vehicles will affect their value but contagion is unlikely as these funds “have plenty of assets they can liquidate” and normally they do not have a huge amount invested in property in the first place.
Momentum Global Investment Management head of portfolio management James Klempster says: “The very essence of multi-asset funds is to keep eggs in different baskets to ensure that investors are not overly exposed to risks that could otherwise be diversified away. Or to put it another way, we should only take on risks for our investors where we believe they will be well rewarded for it. An illiquidity mismatch is not, in our view, a risk that investors are fully rewarded for.
“To that end, multi-asset funds should always be well diversified in terms of asset classes, sectors, regions and, where third party managers are used, multi-asset fund managers must ensure the minimisation of specific risks posed by particular quirks.”
The Bank of England and the FCA have already said they are looking at emergency measures to stem the outflows from property funds. Among the suggestions are limiting liquidity to match the assets, requiring investors to give a notice period of between 30 days to six months in order to redeem, increasing fund liquidity buffers by holding more property-related shares and bonds, or introducing swing pricing, where investors who sell large holdings have to accept a lower price.
But Axa Wealth head of investing Adrian Lowcock says: “Daily liquidity just doesn’t work for commercial property investing and that leads to unrealistic expectations among investors who will expect liquidity. The challenge is putting the right controls in place, while not making the market unpopular among investors.
“Having a higher cash buffer will have detrimental impact on fund performance as they will lag in a rising market. At the same time investors are paying fees, which end up going into cash, so I am not convinced investors will appreciate a higher cash buffer.”
Khalaf says holding more shares in property funds runs counter to what investing in the property sector is all about.
He says: “You can sell shares quickly but a lot of investors hold property as a diversification away from shares. Property shares are more correlated with the equity market so you are undermining the very reason for these funds being in existence by asking them to invest in cash and property shares.”
Lowcock adds removing daily dealing “solves the issue” but says if the timescale between requesting money back and getting it is too long that will deter many investors.
He says: “It is hard enough to switch from a sector at the right time but to try and judge it six months in advance will be near impossible for many investors.”