Wealth managers looking to take advantage of widening discounts in REITs were to blame for the trading suspensions of open-ended UK commercial property funds that took place following the UK's vote to leave the EU last year, according to Aviva Investors' Euan Munro.
Munro, who is chief executive of the firm that runs the £1.4bn Aviva Investors Property Trust, said professional advisers were looking to profit from an arbitrage trade that opened between open-ended funds and their listed property company counterparts, according to the FT.
Aviva Investors suspended trading in its property fund in July last year, and was one of many to prevent investors from making redemptions for several months following the vote, including M&G, Columbia Threadneedle, Henderson and Standard Life Investments.
The groups saw a wave of clients trying to exit the asset class on fears commercial property values would sink post-Brexit, but Munro believes panicking retail investors wanted to sell their units in open-ended property funds in order to buy shares in listed real estate investment trusts (REITs) as they were trading on wide discounts.
He said: "[REITs] reacted immediately post-Brexit [vote] with a 15% discount, so professional investors — and it was nearly always wealth managers and professional investors — said 'I am going to sell the fund and buy the REIT'."
"Why would you not do that? If I could have done that, of course, it would have been an interesting thing to do. Our job is not to allow people to make easy money from obvious arbitrage," he added.
While trust share prices reacted immediately to changing market sentiment, the structure of open-ended funds meant they had a built-in lag and are priced according to the underlying property valuation, which became unclear immediately after the June vote.
Although commercial property values were expected to fall in the event of a Brexit vote, a lack of transactions over the referendum period made it difficult to assess the value of these assets.Munro said when Aviva Investors reopened its property fund in Decemberonly 'one or two' investors withdrew their cash.
He said: "We have not seen a flood because the arbitrage trade is not there any more, and the [share price] of REITs has gone back up."
The Financial Conduct Authority (FCA) released a note in July last year reminding fund managers of the necessity of reporting any planned suspensions and treating all investors fairly.
It said fund managers had a "duty" to make sure their assets were valued "fairly and accurately" to prevent a situation where "some investors [gain] at the expense of other investors in the same fund".
Earlier this month, the FCA launched a discussion paper entitled Illiquid assets and open-ended investment funds which looks at whether further regulatory intervention may be needed to protect consumers in open-ended funds investing in illiquid assets.
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