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However, with the referendum so close to the quarter-end, redemptions rose again on 30th June and 1st July as wealth managers and others reduced their exposure to real estate as an asset class in quarter-end allocation decisions. It was this that triggered fund suspensions. Standard Life was the first on 4th July. Many others, but not all, followed.
Aberdeen introduced a further, substantial reduction in the redemption price for its open-ended fund to reflect the significant discount offered in the asking price to allow rapid asset sales to meet redemption requests. As this affected the price of the assets being sold in forced circumstances rather than the value of the portfolio as a whole, this adjsutment applied to the redemption price of departing investors rather than to the net asset value overall.
Over the summer of 2016, those funds that had suspended disposed of assets to raise enough cash to meet redemptions and reopen. Columbia Threadneedle Investments announced on 12 September 2016 that it would reopen its retail fund for trading on 26th September 2016. In the subsequent weeks other managers announced that their funds would also reopen for trading, Aviva Investors being the last to do so.
Where are we now?
Four years on and most of the real estate funds for retail investors are again suspended as a result of covid. Unlike 2016, this is a result of valuation uncertainty rather than any immediate liquidity issues. In the UK, regulatory changes coming into effect in September make suspension of funds for retail investors mandatory where the valuers apply valuation uncertainty clauses to 20% of assets. These provisions are much more explicit than the rules in place in 2016, where the requirement to suspend in the event of valuation uncertainty was itself uncertain. In advance of the new rules coming into effect from September, managers of funds applied the new requirements early and suspended. Many, but by no means all, funds for institutional investors also suspended redemptions, either because their fund documents required it or because they followed the path of the retail funds.
At the time, AREF and INREV were in the process of finalising a consultation on the pricing of subscriptions and redemptions in open-ended funds and released the chapter on pricing in dislocated markets early so that managers could use it as guidance for the March quarter end. The full consultation and supporting document have now been released and can be found here.
For the retail funds themselves, what happens next is less clear. Although the valuation uncertainty, at least in the strict technical sense, is starting to lift, the regulatory uncertainty remains. The consultation process over what should happen has been long and convoluted. A year ago, we wrote an equally long and convoluted blog about it, which you can find here. We originally wrote this in May last year, but then had to update it almost immediately to take account of the Woodford scandal that began to unfold on 31st May. It also caused further introspection on open-ended funds at the FCA.
As previously mentioned, we undertook the independent review of fund behaviour after the EU referendum for AREF. We thought that the recommendations were relatively simple to implement and the FCA accepted that action was required. A combination of lack of bandwidth at the FCA due to the focus on “delivering Brexit” and concentrating on action in respect of existing funds means that limited regulatory attention has been devoted to delivering a different fund model to widen consumer choice for the retail investor. We remain optimistic that this will happen eventually, although perhaps not exactly in the form we had hoped.
The Bank of England intervened in the discussions in December 2019 in its its Financial Stability Report which followed on from an initial pronouncement in the July Financial Stability Report, "Tackling vulnerabilities in open-ended funds". The Bank press release that accompagnied the report noted that there would be proposals from the FCA in 2020. Since then Andrew Bailey has moved from being head of the FCA to Governor of the Bank of England so is presumably now encouraging his former colleagues to get a move on....