Hello friends, and welcome to another top-class Wednesday update. The undisputed worst year ever rattles on, yet pleasingly there are some comforting signs of normality. The sun is shining, England have won a test series, and Mark is taking a well-deserved break (it says here) enjoying the Scottish weather. So, for another week I’m back in charge of the good ship TCWU.
Lots going on this week, but the main thing that caught my attention is the new FCA consultation on property funds. CP20-15 is, as the name suggests, a consultation, and whilst it will remain open until 3rd November (coincidently 90 days away…) they will look to publish a policy statement with final rules “as soon as possible in 2021”. Not yet a done deal, but well along the way to being so.
This work is designed to address the issues being faced by investors in open-ended funds that invest directly into property, for example commercial buildings. The FCA’s own data (Annex 2, 9 in the CP) shows there are 18 daily dealt UK authorised funds investing this way, with a further 13 feeder funds. Total AUM for these funds was around £17bn as of 31st March 2020. Nothing much has happened since then so I’m sure that figure is still broadly accurate…
As most TCWU readers will know, the majority of these funds have been suspended for a good chunk of 2020. Covid uncertainty combined with market volatility has meant the funds have struggled to manage liquidity. To address this the funds have significant holdings in cash – 17% (according to FCA data) or £2.8bn of the total AUM. This compares with around 2.5% for the average equity fund. Cash is, of course, a long term drag on investment returns, and especially when you are paying active management fees, so this isn’t a good place to be.
YOU’LL NEED TO BE PATIENT …
The FCA plan is to introduce a notice period in the region of 90 to 180 days for anyone invested in these funds who wants to make a withdrawal. Via a to-be-defined process, you’ll need to serve notice (which is irreversible) and then wait to get your money back. So, do it today and get your dosh early November. Or if it’s 180 days, early February 2021. By which time we could all be hunting each other for food so the money could be really handy.
As with any consultation a lot can happen between now and any implementation date, but as it stands it strikes me that this could spell the end for these funds for all but a small minority of retail investors. With the increasing adoption of outsourced investment solutions such as model portfolios and discretionary solutions it’s hard to see how you can balance out the need for individual client notice periods whilst investing in a portfolio that potentially 100s of other clients are also invested in. Many (but not all) model portfolio and DFM providers already discount property funds for this very reason. New investments into these funds could be limited to individual clients investing in bespoke portfolios, and even here I suspect many advisers will take the view that the additional complexity and risks outweigh the potential returns. Not least since the asset class itself potentially has some very challenging times ahead.
For existing clients, the FCA suggests that “where there is an ongoing advice relationship, they (advisers) will need to consider the ongoing suitability of investments in such funds”, so the advised element of the £17bn could well move reasonably rapidly. Rebalance the portfolio now and get out whilst daily dealing is still in place, or stay invested and inherit the new regime? Advisers will need to make this assessment and advise clients accordingly.
It’s also worth considering the impact to platforms, both advised and direct. If they hold these funds they will need to build in systems/processes to deal with the notice periods, and direct platforms making them available on a non-advised basis will “need to consider the appropriateness of making such funds available”.
So, all in all potentially a big change, and one that really could put the death grip on using OEICs as a vehicle for investing into direct property. And maybe, this is exactly the outcome the FCA are hoping for?
LINKS
Double duty for me this week – not only with the update, but also HomeGames. I’ll be chatting with Anthony Morrow, CEO and co-founder of online advice business, Open Money. If you are reading this before 12:30pm Wednesday, join us live at https://www.crowdcast.io/e/homegames-2 . Or if you need to catch up you can do so via our youtube channel.
We’ll be chatting about Open Money’s new Advice Gap paper. You can download a copy from their website at https://www.open-money.co.uk/advice-gap-2020
Will Robins has taken time away from tending his figs to write a pretty hard hitting editorial. Well worth reading and pondering.
Finally, and following on from last week’s update containing the tragic news of Greg Kingston’s passing, his family and friends have set up a page where you can, if you wish, make a donation in his memory. https://uk.virginmoneygiving.com/fundraiser-display/showROSomeoneSpecialPage?pageUrl=GregKingston
And to close, David Byrne with a reminder (if needed) as to just what an incredible performer he is…
See you next time
Mike
