Brexit Hits Property Funds — Compensation Could Hit £140 Million

Date Published: 8 July 2016

Category: Brexit, Investment, Uncategorized

Tags: ,

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SCM Direct warned the FCA, post-Brexit, on Monday 27th June that large UK physical property funds needed to be urgently re-priced or suspended to protect investors.  Yet the majority of these funds took up to nearly two weeks to materially re-price or suspend dealing.

The question is who is culpable for the c. £140m of possible compensation payments into these funds?

SCM Direct’s calculation, based on recent pricing adjustments/suspensions, are that major property funds could face being forced to inject c. £140m into their funds to compensate funds for allowing exiting investors to sell their holdings at materially inflated prices post Brexit.  The remaining clients should be compensated via their funds as they have suffered from this extra money being given away to redeeming clients.

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SCM Direct has been highlighting this serious liquidity issue in retail property funds since August 2015.  Yet neither the FCA nor the fund groups ever properly addressed this issue?

How can you run and market a fund purporting to offer investors daily liquidity when typically, 80-90% of the fund is locked up in illiquid investments that might take several months to sell in a downturn?

Back in August 2015[1] I was quoted in The Times saying:

“It is pretty obvious that if fund managers hold office blocks and retail warehouses in their property portfolio it is going to take time to sell them when they are required to do so. This poses a potential liquidity problem, especially if everyone rushes for the door at the same time.……I think there should be a wider discussion about whether it is appropriate for mutual funds to invest in physical property, since I fear many retail investors do not understand the significant liquidity risks attached.”

[1] http://www.thetimes.co.uk/tto/money/investment/article4531079.ece

On the 24th June, the morning after Brexit was announced, listed UK Property stocks collapsed — as the chart above shows, with British Land and Land Securities shares falling by 19 and 16% respectively.

What happened next?  Very little.  

We analysed 8 leading physical property funds — the timeline below shows their inertia and how long it took different groups to either suspend their funds or significantly mark down their unquoted physical property holdings, to fulfil their Treating Customers Fairly (TCF) responsibilities.

June 24th AM Brexit Result announced – UK listed property stocks collapse prior to the 12 PM fund pricing cut off.  British Land falls by 19% and Land Securities by 16% during morning.

June 24th Henderson UK Property Fund makes adjustment to reflect their view of fall in values of physical property holdings. Overall Henderson property fund price falls 4.0%.

June 27th AM — SCM telephones FCA Market Abuse line to warn them of material over-valuations within many major property fund group funds and recommending either funds to be suspended or re-priced to reflect reality of comparable listed property stocks post Brexit.

June 27th L&G UK Property Fund makes adjustment to reflect their view of fall in values of physical property holdings.  Overall L&G property fund price marked falls 4.2%.

June 28th Aberdeen UK Property Fund makes adjustment to reflect their view of fall in values of physical property holdings.  Overall Aberdeen property fund price falls 3.9%.

June 29th PM — SCM talks to FCA senior individual alerting them of significant mis-pricing in many UK property funds.  Urges the FCA that it needs to act quickly to protect clients within the funds. 

June 30th Standard Life & F&C UK Property Funds make adjustments to reflect their view of fall in values of physical property holdings.  Standard Life property fund price falls 4.2%.  F&C property fund price falls 6.7%.

July 4th Standard Life suspends UK property fund.

July 5th M&G and Aviva suspend UK property funds.

July 6th Threadneedle and Henderson suspend UK property funds.  F&C makes adjustment to reflect their view of fall in values of physical property holdings.  F&C property fund price falls 5.0%.

July 7th Aberdeen UK Property fund announces 17% exit penalty.  L&G UK property fund makes extra 10% reduction to price of property fund.

Could it be the suspensions were eventually forced on these groups by the FCA reminding them of their core TCF responsibilities, or was it because investors had spotted the huge gap that existed post Brexit between the small write-downs of physical property funds compared to much greater falls in many listed UK property stocks?

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The fundamental question has to be whether or not these groups met at all their requirement to Treat Customers Fairly (TCF)? All firms regulated by the FCA ‘must pay due regard to the interests of its customers and treat them fairly’.  The TCF (‘treating customer fairly’) principle aims to raise standards in the way firms carry on their business by introducing changes that will benefit consumers and increase their confidence in the financial services industry. By doing nothing, investors redeeming were almost certain to be selling their units at a materially inflated price, subsidised by the remaining holders in the fund.

Should these funds be forced to compensate the fund for transactions they allowed to take place at inflated prices, between the Brexit vote and the time of their suspension?  If yes, at what level?  If we assume that c. 10% of these funds were redeemed prior to suspension or 15%+ price adjustment, at prices potentially c.10% too high, it has cost the other investors in just these 8 physical property funds alone c. £140m directly (the 8 funds being worth close to £14bn).

More importantly should some of these Chief Executives now ‘walk the plank’ given their shocking refusal to act in the best interests of their clients?  How can some of these Chief Executives possibly meet the ‘Fit and Proper’ test required by the FCA in such circumstances?

Was the FCA Asleep at the Wheel?

The new FCA Chief Executive, Mr Bailey has been quoted as saying on the 5th July “We have been in close touch with these firms involved with these funds. But my preliminary feeling, after two and a bit days, is that these issues need to be looked at.”[2] BUT what happened before these ‘two and a bit days’ as SCM had already warned the FCA before this on the 27th June?

[2] https://www.fundstrategy.co.uk/fcas-andrew-bailey-property-fund-structures-reviewed/

Alan Miller — CIO, SCM Direct.com

alan@scmprivate.com

Tel: 020 7838 8650

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