15 May 2017

Financial Times: Asset managers struggle with illiquidity trap

The concern was that there would be a repeat of the 2007 UK property crash, when fire sales of assets by struggling fund managers added pressure to an already falling market.

When the UK did then vote to leave the EU on June 23 last year, resulting in investor panic about property values, the asset managers’ contingency plans were put into action. Seven large funds holding about £15bn of investors’ cash between them were suspended on fears that they would run out of liquidity and not meet redemption requests. The funds were later reopened when the markets calmed down.

Since then, property fund managers have been meeting regularly to discuss what should happen next. “The industry is faced with damage limitation and a lot of uncertainty,” says David Wise, property investment director at Kames Capital.

Regulators have long been concerned about potential risks of open-ended property funds. These let investors withdraw cash daily, even though it takes months to buy and sell the buildings that make up their portfolios. The Bank of England first raised concerns in 2015 and had called property fund managers in to discuss liquidity issues ahead of the Brexit vote.

In February this year the Financial Conduct Authority, the UK regulator, launched a discussion paper on the mismatch between how quickly funds promise investors their money back and how quickly they can convert their underlying holdings to cash.

While some in the fund industry were worried the regulator would introduce a blanket ban on open-ended property funds, the FCA instead suggested modifying the structure — a move Mr Wise says is “very encouraging”.

The Association of Real Estate Funds (Aref), a trade body, has produced its own discussion paper. “The question is how can the funds be improved if they need to be improved?” says Guy Glover, fund manager at BMO Real Estate Partners. “There has been lots of head-scratching.”

One of the possibilities raised by the Aref paper is preventing funds from offering daily access to cash. “Insisting on daily liquidity doesn’t give retail investors protection,” says the report’s author, consultant John Forbes.

Full article on Financial Times (subscription required)

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