An unexpected accounting side-effect made itself felt when the Net Asset Value (NAV) of the Glanmo...
An unexpected accounting side-effect made itself felt when the Net Asset Value (NAV) of the Glanmore Property fund fell by around 2.5% after it switched into an open-ended vehicle.
The reason for the drop was that accounting standards for open-ended funds are different from closed-ended ones – the NAV has been adjusted to take account of the current negative values of the fund's hedging instruments, reducing the total return for the 12 months to 31 December to 6.34%.
Paul Field, sales manager of commercial property funds at Tilney Investment Management, said: "I appreciate that this is a disappointing return compared to expectations but I stress the cause is an accounting imperative, not a cash loss.
"The response to the situation from intermediaries has been sympathetic. Although there have been one or two minor investor redemptions, most investors have stuck with us."
Field explains the fund has around £280m worth of debt. About two-thirds are fixed rate, but one-third is on floating rates which derivatives are bought against to protect against movements in interest rates.
Under the new accounting standards, the derivatives have to be accounted for under a breakage basis, if it was going to liquidate and redeem in the short term rather than the long term. Although the fund has not lost any money, it has hit the NAV, reducing the returns.
The fund advisers have confirmed to the board that the revaluation of the hedging instruments represents best practice for the valuation of the fund, and as such the board had no choice other than to comply immediately.
The board is considering, in consultation with its advisers, ways in which the fund's debt can be restructured to avoid exposure to such volatility in the future, while retaining good levels of protecting against upward interest rate movement.
This could include putting the loan just on a fixed rate.
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