Last week we recommended our clients sell their holdings in the L&G UK Property fund, one we have long liked and used. Everyone agreed and on Monday we placed hundreds of trades ready for the fund reopening on 13th October – it was quite an exercise.
We don’t make decisions like this lightly, so I thought I’d share our thought process.
The pandemic means we are at an interesting crossroads for funds investing in physical UK commercial properties, such as offices, shops, industrial parks and warehouses. These types of fund have long been a stalwart of large pension and insurance funds, as income and growth tend to be steady whilst correlation with stock markets is typically low. They wobbled following the Brexit referendum, but we think Covid-19 could be the game-changer.
UK physical property funds suspended in March (M&G earlier) invoking the ‘material uncertainty clause’, as it was no longer possible to provide accurate valuations of the properties they hold.
This was a sensible move to protect investors from buying or selling at unfair prices. However, the situation should now be easing. The Royal Institution of Chartered Surveyors (RICS) recommended lifting these clauses in early September when it felt enough properties could once again be accurately valued. A few funds have since reopened, but most remain suspended.
The key issue with commercial property funds is liquidity. Funds must hold cash (the amount varies widely) to meet redemptions, if that starts running dry they need to suspend whilst selling properties to raise more. It is reasonably ‘normal’ for funds to suspend during tough times and then successfully reopen as things calm down.
So what prompted us to act this time?
Three things. The outlook for UK commercial property is arguably more mixed, particularly for funds with greater exposure to retail, leisure and office space (the latter especially in central London). Wider lockdowns could resurface, in which case ‘material uncertainty’ hence suspensions may too. And the FCA is currently reviewing whether it should impose a 90 or 180 day notice period on these types of fund to help them better manage liquidity.
These factors combined mean that, in our view, Covid-19 has materially changed the risk of and outlook for this type of fund. We decided that the safest thing to do for our clients was to act immediately the L&G fund reopened, with its liquidity at its highest.
It’s a decision made with heavy heart. We have long regarded L&G as the foremost fund in the sector and that view is unchanged. With high liquidity and a sensible portfolio of properties (low retail, leisure and London office exposure) it appears better positioned to weather the pandemic than most. But the risks have shifted, and our clients would not thank us if there are further suspensions – better to remove that risk altogether.
So we found ourselves putting business on hold for a few days whilst providing the advice to all our clients and then everyone in the company placing trades as soon as L&G reopened to accept them, ensuring our clients were at the front of the queue.
It has all gone smoothly so that we, and more importantly our clients, can now watch developments in the sector as interested bystanders.
Decisions like this are a big distraction that cost us money, since we earn no additional fees. But, when it comes down to doing what we think is right for clients, commercial considerations fly out of the window. Much like us closing for new business over the summer so we could focus on reviewing all our client’s situations in light of the pandemic. We believe a little financial pain shorter term is a price well worth paying to build a really strong business where our clients know that they come first.