The circa £18bn now locked up in property funds has placed centre-stage the issues with liquidity mismatch in funds, but that’s a debate for another day.
Whether Brexit can be blamed for property funds’ ills is not as clear-cut as some make out. Outflows from property funds had begun before Brexit, as had warnings of a cyclical downturn in the sector. No doubt, fears over prices as a result of Brexit will have exacerbated the problem, but in this instance the EU referendum result may be a convenient scapegoat.
As we pointed out in the Fund Strategy cover story last month, the party for property was running out of punch ahead of Brexit. Some put that down to pre-referendum fears, but other (more sensible in my opinion) people put it down to the turning of the cycle.
As the piece highlighted, during the first quarter of 2016, property funds endured three straight months of outflows to the collective tune of £166m, according to Investment Association numbers.
Investors were given warnings of the liquidity problems in property funds when fair value adjustments were applied to a number of funds. The closure of the Standard Life Investments property fund, which was the first to gate, sparked the trend. The gating of the fund, which had £2.9bn in assets at the end of May and 13 per cent in cash, likely caused some panic in the market, leading to heavy selloffs in other funds as fears of the “Brexit risk” spread.
What’s more, a number of commentators and media outlets then determined that there were fears of “contagion”, suggesting that multi-asset funds and model portfolios could face a liquidity drought due to their allocation to property. More measured commentators were calmer, pointing out that property represents a small portion of a multi-asset fund and that the job of multi-asset funds is to be well diversified over the long term.
While the impact of Brexit has many more twists and turns to come, likely over many years, let’s not blame every market move on the referendum decision.