Please see below an article published by A.J. Bell yesterday, outlining why the reduced liquidity in property funds is not necessarily a bad thing:
Thanks to the introduction of technology, a competitive landscape for products and platforms and the general faster pace of 21st century life we have all got used to the idea of being to buy and sell our investments whenever we want.
The idea of giving six months’ notice to exit an open-ended property fund, a key recommendation put forward by regulator the Financial Conduct Authority in its latest response to the problems in this space (3 Aug), seems extremely onerous.
However, it is probably a move in the right sort of direction. Most open-ended property funds have been suspended anyway since March amid uncertainty over the valuation of their assets thanks to the Covid-19 pandemic.
Expectations of being able to buy and sell units in a fund which invests in an asset class which can take weeks or even months to sell was always liable to throw up problems.
These were particularly acute in the financial crisis and after the Brexit referendum, when facing a wave of redemptions as investors looked to sell out of the funds, managers ran out of cash and the funds had to be suspended.
THE DIFFERENCE BETWEEN TRADING AND INVESTING
Selling an asset during a period of intense volatility, when the kinds of liquidity issues seen with property funds are most likely to crop up, is not likely to be a good idea.
And while six months might seem like a hell of a time to wait, for an investor with a long-term horizon it is really the blink of an eye.
There are two main ways of profiting from the financial markets. The first is to buy and hold assets with the aim of achieving a reasonable and sustainable return. The second, higher risk approach, is to trade in and out of assets for a quick profit.
Only someone pursuing the former strategy could accurately be described as an ‘investor’ as opposed to a ‘trader’.
The biggest downside of the proposed 180-day notice period from this author’s perspective is that appears you would agree to sell at a price which you would only discover when the notice period came to an end.
If you want more flexibility and crucially transparency there are other options. You could buy a real estate investment trust or other property-related trust.
As these trade on the stock market you can buy and sell more or less whenever you like at a price you can see immediately but you also need to accept that trusts may trade at a discount to their net asset value, particularly in difficult markets.
As our clients are investors, not traders, we do not see this as an issue and generally the exposure to Commercial Property is nominal when you look at the average portfolio.
Please continue to check our Blog content for advice and planning issues and the latest investment, markets and economic updates from leading investment houses.
Please keep safe and healthy.
Carl Mitchell – Dip PFS
IFA and Paraplanner