The Financial Conduct Authority (FCA) is consulting on proposals to reduce the potential for harm to investors from the liquidity mismatch in open-ended property funds.
The FCA’s proposals comes in light of a slew of property fund suspensions due to Covid-19 and prior to that the Brexit vote in 2016. In December 2019, for example, one of the largest funds – M&G Property – suspended dealings.
Just three funds have achieved positive returns in the year-to-date – BMO UK Property, ARC TIME Commercial Long Income and MGTS St Johns High Income – according to US funds data firm Morningstar.
What does the FCA intend to do?
The new rules as proposed by the FCA would require investors to give notice – potentially of up to 180 days – before their investment is redeemed.
The proposed notice period would allow the manager to plan sales of property assets so that it could better meet redemptions that are requested. It would also enable greater efficiency within these products as fund managers would be able to allocate more of the fund to property and less to cash for unanticipated redemptions.
Ian Mason, head of UK Financial Services Regulatory Team at Gowling WLG says: “The FCA’s approach should enable property fund managers to take a more orderly approach to redemptions, rather than the last-minute rush from worried investors that we have seen in recent years. However, property investors will need to plan ahead more and look at the longer-term.”
Christopher Woolard, interim chief executive of the FCA, adds: “We think that our proposals will help further our consumer protection objective by reducing the number of fund suspensions, preventing unsuitable purchases of funds, and by increasing product efficiency for fund managers.”
“We want open-ended funds to provide a structure through which investors can safely invest in less liquid assets which offer attractive expected returns and at the same time supports investment that benefits the wider economy.
“We hope the proposed new rules will directly address the liquidity mismatch of these funds making them more resilient during periods of stress and allowing them to operate in a way that all investors are treated equally.”
The FCA’s proposals regarding open-ended property funds have met with criticism by some, however.
Dzmitry Lipski, head of funds research, interactive investor, says: “While these proposals address the liquidity mismatch in open-ended funds, they come with strings attached. After so many property fund suspensions over the past four years, many property fund investors have seen their assets go into deep freeze. [The] proposals, with a notice period of up to 180 days, mean that investors will still effectively have to keep their assets on ice for up to six months.
“Proposals making this a norm, rather than an exception, might spare fund management groups a few blushes, but we question what investors have to gain by sacrificing daily liquidity, given that there is a good structure for investing in illiquid assets already in place – investment trusts.
“No structure is perfect, and the share price may still come under pressure in a distressed market, and discounts could widen. But on balance we still prefer the closed ended structure when it comes to less liquid assets as it gives instant access to investors’ money.”