Property funds ill-prepared for turmoil, says UK watchdog
London — Asset managers did not plan properly or have clear procedures for valuing their property funds under stressed market conditions such as those in the aftermath of Britain’s June 2016 vote to leave the EU, the UK’s markets watchdog says.
Several property funds were suspended after the vote as investors tried to pull their money out amid speculation that Brexit would hit commercial property prices.
The Financial Conduct Authority examined the sector’s responses and published a report on Thursday, saying property funds should take external events into account as part of their planning for possible market squeezes.
"We found that the use of suspensions, deferrals and other liquidity management tools were effective in preventing market uncertainty from escalating further," it said. Firms could be clearer in their communications, including to end-customers, following significant market events, it added.
Some unit-linked or pooled asset providers "did not appear to understand fully the underlying portfolio of open-ended funds they were investing in". All firms that suspended funds or made changes should review how they responded to the Brexit vote turbulence, it said.
"In some cases, individual firms will have to implement remediation measures to ensure they comply with our expectations and requirements."
The watchdog said it was still looking at the broader issue of open-ended funds’ investments in illiquid assets, including whether the rules needed to change.
Cathy Pitt, a funds lawyer at law firm CMS, said the comments on communications and stress-testing of valuations gave a clue to the watchdog’s possible actions.
Aberdeen Asset Management said it had adopted a cautious strategy in the months running up to the referendum, but the Financial Conduct Authority review showed that lessons could be learnt across the sector.
"It’s clear that a number of property funds should have had, as a precaution, higher levels of liquidity ahead of the EU referendum," Aberdeen said.
"We will study the report in detail to see if any further improvements can be made."
Within three weeks of the June 2016 vote, seven funds had pulled down the shutters, leaving more than £18bn frozen in the biggest seizing up of investment funds since the 2008 global financial crisis.
Funds affected included those run by Columbia Threadneedle, Aberdeen, M&G Investments, Aviva Investors and Standard Life Investments.
UK-based open-ended property funds — meaning no restrictions on putting in or taking out money — had €35bn invested in commercial real estate at the start of 2017, the Financial Conduct Authority said.