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IFAs exposed to property fund suspensions due to ‘DFMs’ whims’

With the Brexit endgame open-ended, advisers are concerned the regulator has not done enough to protect property funds against the whims of DFMs

IFAs exposed to property fund suspensions due to ‘DFMs’ whims’

When the UK voted to leave the EU in 2016, the property investment market froze. A torrent of withdrawals from open-ended funds spooked the industry and caused a wave of fund suspensions.

Consumers and investors raced to withdraw their capital amid the uncertainty following the referendum. Almost £18 billion in investments were locked down in the biggest market suspension since the 2008 financial crisis.

Almost three years later, concerns over the UK property funds market have risen again, after the continued deadlock and confusion in parliament over the EU withdrawal. Some fear 2016 could be repeated if this delay persists and withdrawals continue at their current levels.

The clearest signal of concern was late last year, when the Financial Conduct Authority (FCA) announced it would require daily updates from investment firms on open-ended property funds. Withdrawals had spiked in the latter part of 2018 – totalling more than £450 million. The biggest market sell-off happened in December 2018, with £285 million withdrawn in that month alone.

On thin ice

Martin Cawley, managing director of London-based Devonshire Wealth Management, said the benefits would have to outweigh the risks for his firm to invest in open-ended funds again.

‘The funds that are not suitable for inclusion in portfolios are ones that require daily liquidity reporting when there is a negative overriding sentiment in UK property.

‘For open-ended vehicles, the return outlook would have to be greater to outweigh the liquidity risks. We prefer to use closed-ended vehicles for clients looking to invest in this asset class.’

However, even if mass withdrawals continue, Cawley thinks Devonshire is better prepared than it was in 2016.

‘The likelihood of mass suspensions occurring is much lower than in the past, as managers have taken measures to ensure cash positions remain elevated. The Legal & General (L&G) UK Property fund we used to hold didn’t close over the most recent bout of suspensions.’

The L&G fund, managed by Citywire AA-rated Michael Barrie and Matt Jarvis, has returned 15.1% over the past three years, ranking 10th out of 35 funds in the Citywire Property - UK Physical sector. 

The Kames Property Income fund ranks 20th in the same sector. Managed by Citywire + rated David Wise and Richard Peacock, it has returned 8.7% over three years.

Darren Lloyd Thomas, managing director of Haverfordwest-based Thomas and Thomas Finance, said he was concerned about potential suspensions in the current climate. He said IFAs were particularly vulnerable to discretionary fund managers (DFMs), which could quickly leave other investors stranded if they suddenly pull their money. 

‘I am really concerned about suspensions on funds that don’t have the ability to swing price,’ said Thomas. ‘The problem is DFMs who just throw huge amounts in and out of these funds and don’t treat them as long-term bricks-and-mortar investments for their clients.

‘Until the big fund groups ban the large holders, IFAs will constantly be on the end of DFMs’ investment whims. We have reduced property exposure and actually find it is becoming less and less relevant as an asset class. It seems to give you all the drag on the way up and all the problems on the way down.’

Coincidentally Thomas and Thomas also uses the L&G UK Property fund ‘because of its swing pricing, which means you can still put money in to it when other funds are suspending’.

Of property funds, Citywire head of investment research Frank Talbot said: ‘It’s illiquidity makes it risky and the gating of the bulk of physical property funds around the referendum only served to underscore that risk. The UK has one of the highest mortgage rates in the world, so why do investors need more property risk?’

What, then, is the regulator doing to prevent a repeat of 2016? ‘As you would expect, we regularly monitor markets and funds. We are also in frequent contact with firms and continue to engage with them on a wide range of issues,’ a spokesperson said.

The FCA also consulted on new rules for open-ended funds last year, which found regulatory framework for open-ended property funds were not needed. But those words of reassurance are unlikely to assuage concerned IFAs’ fears.

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