Many of our clients may have seen the news over the past couple of days and wondered if their portfolios are affected by the sudden lock down of many UK Commercial Property Funds.
‘Bricks and mortar’ Property funds invest into office blocks, retail outlets and industrial units. They then pay the rents back into their funds. The skill of the fund manager is evidenced in how well they pick their assets and their tenants.
A traditional bricks and mortar fund will offer good negative correlation within a portfolio because it will often move in a different direction to either Fixed Interest Securities (Bonds) or Equities (Shares). I firmly believe that Commercial Property funds will have a place within many of our clients’ portfolios for a long time to come.
However, on Monday, Standard life announced that they had ‘suspended’ their Property fund. There was then a swift following of others such as Aviva, M&G, Aberdeen, Canada Life and Henderson. So what is a fund suspension and how does it affect investors?
Because property funds are not liquid in the same way as shares and bonds, they have to keep cash reserves to cover the amount of withdrawals they expect at any one time. However, if there is uncertainty in the market, those withdrawals can rise and the fund manager then faces a choice. Either ‘fire sell’ property or lock the fund down to prevent the withdrawals.
The locking down can allow the fund manager some time to sell property for a better price to meet the redemption requests. It also deters ‘tourist investors’ from trying to make a quick buck and put stress on the funds. The lock downs are nearly always for 28 days, but I have seen these usually go in to rolling periods spanning 3-6 months.
Whilst the decisions to lock down many of the sectors funds is a real inconvenience to us and our clients – we actually welcome it. The alternative would be an insane downward tumble in prices which could have dramatic consequences for the whole sector.
If modern history repeats itself, we know what happens next! The Bank of England recognises an economic slow-down. It then floods the money supply through Quantitative Easing. This causes bond yields to fall even further and their prices to rise. Interest rates fall (to zero this time) and bank deposits pay zero interest. At the back of this cycle (probably around 12-18 months down the line) the tourist investors all start piling back into commercial property – seeking a higher income yield. Of course this is in no way guaranteed – the future is never certain.
At Thomas and Thomas we subscribe to ‘Markowitz’ theory. We believe that a key sector such as property can be trimmed back, but it still offers something for the long term. Last month we encouraged our level one and two ‘Proactive’ clients to reduce their UK Property fund holdings – particularly those with London based properties.
However, we still believe that an element of this sector will prove lucrative and prudent over the longer term. The media will move on to something else very soon!
Just as a foot note, the UK could well start to look very attractive as an investment option on several levels.
Firstly, I wonder if the Bank of England may launch a Japanese style ‘Qualitative Quantitative Easing’ (QQE) programme. This is different to QE, it actually involves the central bank ‘targeting’ domestic shares and buying those up to encourage domestic investment. This is only my thoughts at this stage and nothing has been announced.
Secondly, Mr Osbourne has publicised his hopes to reduce the level of UK Corporation Tax from a fairly low 20% to an incredibly low 15%. This announcement has already caused consternation on the continent as it would give us a hugely competitive edge in attracting foreign investors.
Finally, as Europe enters a very dark time in terms of its financial stability, the UK suddenly looks like the calm port in the storm. It is early to say this, but the crisis rumbling for Italian banks currently makes the Bank of England’s worries look like a bowl of cherries.
I keep going back to Winston Churchill’s quote: ‘A pessimist see’s the problems in every opportunity where an optimist sees the opportunities in every problem’
Enter the era of the optimist…….