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Since the report was published, there has been an increasing acceptance by institutional investors of more limited liquidity in open-ended funds to reduce volatility. Many open-ended funds have lengthened the time available to meet redemption requests and made other changes to redemption queuing arrangements. It has also been common for managers to introduce more dramatic arrangements to deal with high levels of redemptions, for example by introducing fixed gates on the volume of redemptions to be met in a quarter or a year. This also has potential drawbacks so there is also interest in more flexible arrangements with the introduction of independent supervision to take some of the subjective elements out of the hands of the manager.
Independent supervisory boards
As mentioned above, management of the redemption process can be a highly subjective process. One possible approach suggested in the report three years ago was the use of independent supervisory boards.
This can also be beneficial in a number of other circumstances. The original report for AREF concluded, "greater use of independent representation as an important element of corporate governance. It is considered that this would help to minimise the perception of conflicts of interest." Since the report, AREF has undertaken further work in this area. At the AREF / IPF seminar in 2014, Howard Meaney of UBS Global Asset Management outlined that the UBS Triton Property Fund was to have an independent supervisory board, which has now been established and which John Forbes now chairs.
We hope that the successful operation of this board, and the similar board already in place at the Hermes Property Unit Trust (HPUT) will be provide an example for for other funds in the UK and further afield.
Where there is any element of redemption, there is always a need to strike a balance between the interests of investors wishing to leave and those wishing to stay.
One of the most dramatic impacts of the crisis on real estate was the redemption crisis faced by the open ended funds. In the aftermath, investors had many questions regarding the behaviour of managers:
i) How well prepared for the downturn and liquidity crisis was the manager?
- How effectively had the manager controlled inflows in the run up to the crisis?
- Had they anticipated an increase in redemptions and built up cash reserves within the fund to put it in a stronger position to cope with outflows?
- How liquid were the fund’s underlying assets?
ii) How well did the manager cope with the decision as to whether or not to suspend redemptions?
- Did the manager implement a decision-making process that ensured the engagement of a broad range of stakeholders?
- How good was communication?
- Did the investors agree with the decision taken?
iii) Did the manager learn from the experience and are the changes introduced continuing?