The Kames Property Income fund has been become the first open-ended fund to suspend since the coronavirus outbreak and comes just three months after M&G Property gated amid concerns over liquidity.
It made the decision to suspend trading on Monday (March 16) and was quickly followed by the Janus Henderson UK Property fund. Aviva Investors Property fund also suspended on Tuesday morning, to be followed by the Standard Life Investments UK Real Estate fund and Aberdeen UK Property. Threadneedle UK Property then suspended on Wednesday afternoon.
The Kames Property Income fund was one of the few open-ended property funds not to suspend trading after the Brexit Referendum in 2016, which sparked widespread panic about the outlook for the property market. It has typically held a good chunk of its assets in cash to help protect the fund from any investor redemptions, and before suspending had 17.7% of its portfolio in cash.
As with the M&G suspension, the funds are now gated for a minimum of 28 days and have both informed the regulator of their decision to suspend trading.
Jonathan Miller, director of manager research at Morningstar, said: "It feels like groundhog day. Whenever we see high levels of uncertainty, volatility and market sell-offs, this comes around again."
Ryan Hughes, head of active portfolios at AJ Bell, said that it was inevitable that further funds would have to suspend: "This is done to protect existing investors and stop investors who wish to sell redeeming at an artificially high price. So, while this will be hugely disconcerting for investors who are trapped in these funds, it’s important to remember the underlying reasons for asset managers making this move."
Willis Owen’s Adrian Lowcock says the coronavirus crisis is just the latest in a long list of events, including Brexit, the financial crisis, to highlight the sector’s liquidity shortcomings.
A Kames spokesman the suspension of the fund was in the best interests of investors and it would provide regular updates on developments. It added: "Folllowing continued market volatility and uncertainty, which began with the 2016 Brexit Referendum and continued in recent weeks with the coronavirus pandemic, the valuers of the fund believe the current market turmoil makes it difficult to provide a true value of the fund's underlying assets. These issues are affecting all areas of the investment."
Janus Henderson stressed its move was not driven by liquidity concerns (the fund currently has 17.4% of assets in cash) but to "safeguard the interests of investors". A spokesman said: "The Covid-19 pandemic has created significant market uncertainty; this has led the independent property valuer to declare that there is material uncertainty of valuations in the UK property market, including those direct property assets owned by the fund."
Aviva Investors said the move is down to the uncertainty in valuing the fund's assets in the current market environment - a concern voiced by the fund's independent valuer.
Aviva said: "Although there is sufficient liquidity in the Fund, we have acted to safeguard the interests of all our investors by suspending dealing in the Fund with immediate effect. We will look to lift the suspension as soon as it is appropriate to do so.”
Aberdeen Standard Investments said: "This action reflects the exceptional circumstances in global markets, including the UK property market as Covid-19 spreads, and the need to protect client interests by suspending trading when there is material uncertainty regarding how the assets should be valued."
Threadneedle UK Property fund manager Gerry Frewin said: "While we appreciate this may cause some inconvenience, our decision to suspend dealing will prevent any investors being disadvantaged as a result of those redeeming from the fund or investing new money into the fund at an inaccurate price."
Will All Funds Suspend?
The inability to value assets in the fund is important because of new rules, which came into force in 2019. The FCA says that if there is "material uncertainty" over the pricing of at least 20% of a fund's assets it must suspend trading.
With markets in such turmoil as they are now, AJ Bell's Hughes expects all funds will have to suspend: "With two of the largest independent valuers saying they cannot accurately determine the value of property, it's almost certain that all open-ended property funds will now have to suspend dealing."
M&G Property, one of the largest property funds in the open-ended sector, suspended on December 4, and has remained locked down since. The move highlighted concerns over whether open-ended funds, which have daily liquidity requirements, are the right vehicle for illiquid, direct property investments. “Property funds are no longer functioning well in a world that wants daily dealing,” says Lowcock.
Last week listed property developer Intu, which owns shopping malls across the country, warned it is struggling to survive as the retail sector continues to slide. Its shares have plummeted and the company is one of the most shorted stocks in the FTSE, according to the FCA register.
The Government’s advice to avoid crowds and social interactions to stop the spread of coronavirus has had an immediate impact on the retail sector – and especially large shopping centres, in which many of these open-ended funds invest.
When the M&G fund suspended Morningstar profiled the cash levels held by funds across the sector – at the time Kames was holding 14% cash, whereas some funds were holding 20-30% in liquid assets.
