PA ANALYSIS: Property fund closures a symptom not a disease

Added 11th July 2016

As the Bank of England and the Financial Conduct Authority discuss plans to future proof open-ended property funds, an adage about a horse and a barn door seems appropriate.

PA ANALYSIS: Property fund closures a symptom not a disease

But, while the proposals being tabled sound sensible (redemption notice periods and higher cash buffers) there are bigger questions worth asking – especially in a world where portfolio construction is becoming increasingly challenging.

Primary among these is: what do you want to achieve through an investment in property?

While it sounds a simple one, the question of property allocations is akin to a hydra, answer one part of it and two new questions pop up in its place.

If the answer is diversification, the next question (if one is going the open ended route) is how much exposure are you expecting to have to actual property? Not only do these funds already hold a sizable cash buffer in order to mitigate against the events of last week, but one of the mooted proposals to hold more in liquid ‘cash proxies’ like house builders.

As Charu Lahiri, investment manager at Heartwood Investment Management pointed out in a note on Monday this is one of the key differences between the current property market and the situation in 2007, when the market last saw ‘firesales’

"The question of property allocations is akin to a hydra, answer one part of it and two new questions pop up in its place."

“Open-ended property funds have greater levels of cash in portfolios today than in 2007 (15-20% in some cases), partly due to regulatory pressure post the financial crisis. In 2007, on the other hand, cash levels were very tight and a lot of open-ended funds were holding what they deemed to be “cash proxies”, such as investment trusts and shares in developers which compounded selling pressure in the sector as a whole.

Clearly if the funds have not only a lot of cash but also a lot of cash proxies, one does have to ask just how much diversification they are likely to provide?

An answer of diversification also begs the question, however, of holding period. What has fundamentally changed from the start of July to now that can justify taking as much of a mark down as some investors are willing to stomach.

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Geoff Candy

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Geoff Candy joined Portfolio Adviser as News Editor in May 2014. He has been a financial journalist and broadcaster since 2005 and, in that time has worked in both South Africa and the Netherlands, covering everything from high street retailers and construction companies to mining and insurance.

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