Fund managers say that new proposals to make open-ended property funds fairer for retail investors, following mass suspensions amid the Brexit-related sell-off in 2016, could make it harder for investors to withdraw their money.
The Financial Conduct Authority said that funds invested in illiquid assets such as commercial property and infrastructure could be forced to halt trading as soon as there was uncertainty about the value of 20 per cent of those portfolios.
The proposal was part of a package designed to protect investors in open-ended funds which ran into difficulties after the 2016 EU referendum when a significant number of investors tried to sell at the same time.
Property funds holding about £15bn of investors’ money suspended trading in the aftermath of the Brexit vote as they struggled to sell buildings quickly enough to fulfil daily redemption requests from investors who wished to sell their units. When trading resumed, fund valuations were depressed by large volumes of properties hitting the market at the same time.
The FCA said it was fairer to suspend trading when there was doubt about the value of a fund’s assets rather than “continuing to buy and sell units at a price that may not accurately reflect the fund’s net asset value”.
“The proposals from the FCA will mean that property funds are likely to suspend trading sooner and potentially more frequently than they have in the past,” said Ryan Hughes, head of broker AJ Bell’s active portfolios, adding that “this isn’t necessarily a bad thing”.
He said the rule would make it fairer for investors in property funds by stopping the “first-mover advantage” where one group of investors is able to cash out while others are left stuck in the fund.
Halting trading more quickly could also deter fund managers from selling buildings at heavily distressed prices to meet investor redemption requests, risking triggering a decline in property prices.
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