The risk of contagion from last week’s property fund suspensions is much greater than first feared, with detailed analysis showing that a wide pool of funds have been caught up in the gates imposed on investors withdrawing cash.
Eight companies, including Standard Life, Henderson and M&G, barred investors from selling out of their property funds amid fears about falling commercial real estate values following Britain’s vote to leave the EU.
Many of those investment companies, however, operate separate products that are also invested in the funds now closed to investor redemptions, and could block investors from pulling their money.
Three of Standard Life’s multi-asset products also have 5-8 per cent stakes in the company’s in-house suspended property fund. Another three Standard Life funds have large stakes in Henderson’s suspended property fund.
The worry is that this will trigger systemic problems for the marketplace, which is already reeling from the UK’s decision last month to end its membership of the EU.
A prominent UK fund manager, speaking on condition of anonymity, said: “When you start getting daily trading funds-of-funds investing in daily trading funds that are invested in illiquid assets, that seems to be layering up potential liquidity risks. “[Investors need to] consider the impact on funds that are caught with material investments in the gated property funds.”
Three multi-asset funds run by Henderson also have around 3.5 per cent of their assets in the company’s own suspended property fund, while Aviva Investors’ multi-asset product has a 4 per cent stake in its gated property fund.
Many other multi-asset funds — one of the fastest-selling investment strategies of the past 12 months — run by rival investment managers have also been caught out by the property fund suspensions.
A £129m product run by Prudential has 15 per cent of its assets in the suspended M&G property fund, while a multi-asset fund run by RBS has 8 per cent exposure to Aviva Investors’ suspended property fund.
A spokesperson for Prudential said: “For those multi-asset funds that are partially invested in the suspended funds, UK commercial property is just one asset class within a wide and diverse range of assets worldwide. This means we can continue trading in these multi-asset funds as normal.”
But Danny Cox, financial planner at Hargreaves Lansdown, the investment platform, said his company’s multi-asset funds have no exposure to open-ended property funds because of the inherent liquidity risks.
He added that the exposed multi-asset funds will face liquidity problems if their managers face heavy outflows and are forced to sell their most liquid assets first. “They then might have to gate the whole fund,” he said.
Colin Beveridge, chief investment officer at True Potential Investments, a £4bn investment platform, agreed that multi-asset funds could “end up with a higher proportion of the fund in assets you can’t sell” if they encounter outflows while locked into the suspended property funds.
The gates were put in place after property funds experienced large redemption requests from investors following the British referendum on EU membership last month.
A significant number of asset managers also have significant holdings in property funds run by Legal & General, Aberdeen and Kames Capital, which last week implemented special liquidity measures by reducing the value of the portfolios of their real estate funds by up to 15 per cent.
Seven funds run by Architas, the investment management arm of Axa, the insurer, have 8.5 per cent exposure to L&G’s property fund.
Another two Architas funds have stakes in Kames Capital’s real estate product.
Steve Allen, senior investment manager at Architas, said the devaluations were “obviously frustrating for investors” and that he had no intention of selling out of the L&G UK property product while it was valued 15 per cent lower than it was one week ago.
He acknowledged, however, that he would face difficulties if a large number of investors wanted to redeem from his funds while they were invested in the L&G product.
“That only becomes an issue if the level of redemptions gets to such a scale that the property allocation becomes too big,” Mr Allen said.
“This throws up all sorts of questions about the suitability of daily-traded, open-ended property funds that are giving investors access to an illiquid asset.”
Read the full story at the Financial Times