- Trading in UK property funds totalling £9bn AUM has been suspended, locking investors into an asset class exposure they may no longer wish to have.
- This is a stark reminder that the liquidity of any fund is only as good as its underlying holdings
- Investors using UK property ETFs are unaffected owing to the more liquid nature of the structure and of the underlying
Post-Brexit fears around commercial property values has led to
managers of three UK property funds locking investors in. They fear a potential rush of investors to
sell units following the Brexit result in the EU Referendum. Decisions to suspend will typically reviewed
every 28 days. The funds affected are
those managed by Standard Life, Aviva and M&G, totalling some £9bn of
assets (see table).
While the justification given – to “protect the interests of
all investors in the fund” – is fair and reasonable, some investors may not be
too happy to be locked in for potentially quite a scary ride.
The paternalistic reading is that investors are being
protected from themselves, as they are denied the temptation to panic
sell. Funds that locked in investors in
2008 eventually “came good”. But while
investors may agree that “buy and hold” is right for the long run, that’s not
the same deal as “buy and be held prisoner at the manager’s will”.
This episode shines a much needed spotlight on the opacity
around the underlying liquidity within funds that trade in less
liquid assets. As always, investment
funds are only as liquid as their underlying holdings.
One of the main reasons advisers give for using funds
over ETFs is that daily liquidity is not necessarily important as their
investors take a long-term view. This
does however deny the opportunity to make tactical adjustments to changing
economic circumstances, particularly event-driven ones such as the UK
referendum.
What this episode illustrates that by contrast to funds, ETFs benefit from better internal liquidity (they typically invest only
in liquid securities), from better daily external liquidity (as they are both
OTC and exchange-traded), and from active liquidity management (the creation
and redemption of units through capital markets activity by the issuer).
For UK investors whose property exposure was through ETFs which
such as iShares
UK Property UCITS ETF (LSE:IUKP) which tracks the FTSE EPRA/NAREIT UK
Property Index, the flexibility remains whether to adjust exposure or to
the ride this out. And for portfolio
management, flexibility counts.
In terms of underlying exposure, Property ETFs and Property
Funds are similar but different. Whereas
property funds may have direct exposure to commercial or residential property,
property ETFs typically own shares in listed real estate companies.
As Property ETFs are by nature “equity only”, they can be
expected to have higher volatility than property funds that which have exposure
to bond-like steady streams of net rental income from less liquid direct
holdings. So if risk is defined by
standard deviation, it is clearly higher for a property ETF. If risk is defined by liquidity, it is
clearly higher for a fund.
Aside from volatility, the level of yield from property ETFs
relative to funds is comparable, while the overall fee level is of
course much lower.
For investors seeking exposure to UK property as an asset
class, then exchange-traded liquid ETFs that provide that from a portfolio
construction perspective. But importantly,
property ETFs won’t share the underlying liquidity risk that is (now) all too
apparent.
NOTE
Funds
compared are iShares UK Property UCITS ETF (GBP), Standard Life Investments UK
Real Estate Fund Retail Acc, Aviva Investors Property Trust 1 GBP Acc, M&G
Feeder of Property Portfolio Sterling A Acc. Returns data as of 5th
July 2016 (except M&G as of 4th July 2016). Standard deviationfigures as of 30th
June 2016 for all funds.
NOTICES: I/we have
no positions in any stocks mentioned, and no plans to initiate any positions
within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not receiving
compensation for it.
This article has been written for a US and UK audience. Tickers are shown for corresponding and/or
similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE
Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only,
does not constitute an investment recommendation or advice, and should not be
used or construed as an offer to sell, a solicitation of an offer to buy, or a
recommendation for any product. For more
information see www.elstonconsulting.co.uk Photo credit: pictogram-free.com. Table
credit: Elston Consulting
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