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On 14th February, Janus Henderson announced changes to the pricing of units in its UK PAIF. The the fund will now price subscriptions and redemptions on a fixed dual price. If you want to read the detail, you can find it here.
This is a relatively unusual pricing approach for UK open-ended funds. Most of the open-ended retail funds operate arrangements where pricing moves from bid to offer depending upon net flows. At the time of the EU referendum, one fund manager with a large and successful fund was already operating a fixed dual price model where investors always subscribe at subscription price and investors always redeem at redemption price. In both models some or all of the funds from subscriptions are being used to fund redeeming investors rather than to acquire underlying assets.
In most cases subscriptions and redemptions are netted off by the manager and the full subscription price is only applied to the net subscriptions. Remaining investors are not diluted but investors who get their timing right can buy at a discount and sell at a premium In a model where the full subscription price is applied to all inflows, even where these are used to fund redemptions rather than to acquire underlying assets, this results in a notional “premium” for the benefit of existing investors over and above the price required to ensure that they are not diluted, but also ensures that all investors suffer a round trip cost on subscribing and redeeming that reflects the cost of buying and selling the underlying assets. A swinging price means that investors can make significant returns by buying units at the redemption price and selling them at the subscription price when the price swings. At the time of our report, there was a concern amongst those interviewed that this encourages short term arbitrage by some investors. On the face of it, this does not increase volatility since such investors are investing against the general flow of funds.
However, it may encourage a short term attitude, although we did not identify any evidence of this in our work after the referendum.
At the time of our report, many intermediaries interviewed said that they have been reluctant to recommend investment in funds with two quoted prices (i.e. a fixed dual price model model) as they believe that this is confusing for retail investors. As a result, other fund managers have been reluctant to adopt this model due to the perceived lack of attractiveness to investors. Nevertheless, the fund mentioned in our report was successfully raising capital from those investors who believe that dual pricing is an appropriate model.
Real estate is a complex asset class and there are many different possible fund structures and pricing models. It is therefore to be welcomed that there are two managers offering this pricing model, giving investors the choice of placing money with find managers who offer a traditional swinging price and now two offering a fixed dual price.
The FCA consultation on open-ended funds
The FCA ran a consultation on open-ended funds and illiquid assets (CP18/27), published in October and which closed on 25th January. This was a follow-up to responses to its 2017 discussion document DP17/1 which was published in February 2017 and ran until May 2017.
The CP18/27 proposals cover a number of areas:
a). The introduction of a mandatory suspension of funds where pricing is unreliable due to uncertainty over the valuation of underlying assets. This proposal is fraught with problems and has been met with a robust response to the consultation from the industry. We feel that it is unlikely to be implemented as proposed;