'Draconian' FCA open-ended property fund measures expected to drive flows to trusts and ETFs

The FCA announced on Monday (3 August) its plans to bring a halt to the waves of suspensions in IA UK Direct Property recent years, which included the implementation of a notice period of up to 180 days for consumers redeeming investments.

Client director at Bowmore Asset Management Charles Incledon said the changes would mean "a lot of financial advisers will just stop recommending open-ended property funds to their private clients", while wealth managers will be "far less enthusiastic" about the funds.

He added: "The issue of private investors being unaware that they might be locked into a property fund during an extreme economic event could be dealt with by much more rigorous risk warnings on those funds.

"The FCA says that they don't think that their proposals would necessarily prevent funds having to suspend dealings in times of severe market stress. In which case, would the end result justify such a draconian measure?"

Incldedon also called for further clarity as to whether the proposed notice periods would mean property funds will be excluded from Stocks and Shares ISAs.

He said: "Clearly it would be very damaging if the new rules were to go ahead and HM Treasury subsequently barred property funds from ISAs."

Head of personal investing at Willis Owen Adrian Lowcock added that the notice period will also make open-ended property funds "unappealing" to individual investors, "especially in a time when investors are used to being able to access a growing range of investments with daily liquidity". 

Lowcock said: "Six months is a long time for any investment and the price you get 180 days later could be materially different from the one you expected.

"However, the notice period will help remove short-term investors and would make the asset class less volatile and less susceptible to sell-offs.  

"There will be some disruption, but there are alternatives and the change should present an opportunity for investment trusts and exchange traded funds to come up with a proposition that works."

FCA's proposed redemption notice period could 'kill off' adviser use of property funds

Similarly, head of funds research at interactive investor at Dzmitry Lipski questioned "what investors have to gain by sacrificing daily liquidity, given that there is a good structure for investing in illiquid assets already in place", such as investment trusts.

He added: "No structure is perfect, and the share price may still come under pressure in a distressed market, and discounts could widen.

"But on balance we still prefer the closed ended structure when it comes to less liquid assets as it gives instant access to investors' money."

Meeting international standard

Marc Haynes, head of institutional business, EMEA, at Cohen & Steers said the FCA's proposals "have paved the way for the REIT funds market in the UK", adding that investors concerned about the flexibility of a liquid vehicle are better served by "property securities funds which invest in publicly listed real estate companies and REITs that trade intraday".

However, overall Cohen & Steers welcomed the proposals, which Haynes described as "overdue", and providing vital investor protection measures and mending "some of the reputational damage caused by the wave of lock-ups we have seen over many years".

He added: "Today's proposals bring the UK closer in line with international standards. In the US, for example, there have long been strict limitations on daily dealing open-ended mutual funds investing in illiquids and as a result, over nearly 50 years and across many thousands of funds, there have hardly ever been instances of fund suspensions.

"The proposals outlined may not stop lock ups altogether, but we would imagine they would become less frequent and potentially shorter in duration.

"We believe that the proposals outlined should most importantly ensure that investors will be treated more fairly and enable fund managers to better focus on generating returns rather than managing liquidity. 

"It will also hopefully bring an end to charging investors high fees on large cash buffers. The major question which now remains is whether the proposed 90 or 180-day notice periods for redemptions are sufficient."

Also welcoming the proposals, managing director of the Association of Real Estate Funds Paul Richards said: "Property funds can play an important role in helping savers achieve their long-term financial goals as part of a balanced investment portfolio. Our industry has faced unprecedented circumstances in recent years which have seen funds suspended to protect investors.

"This consultation will offer a welcome opportunity to reflect on how these funds have functioned and where there is room for innovation to ensure that we continue to meet the needs of savers and investors."

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• Topics
• Investment
• IA UK Direct Property
• FCA
• Bowmore Asset Management Charles Incledon
• HM Treasury
• Cohen & Steers