PricewaterhouseCoopers reports for AREF on the ongoing fallout from 2008, writes Jane Roberts
It is not so long ago that some managers of open-ended funds were in the invidious position of having investors screaming down the phone at them over decisions to suspend redemptions.
Although it doesn’t describe the period of three to four years ago in quite such colourful terms, scenes like these lie behind the Lessons from the Crisis report just published by the Association of Real Estate Funds. The study carried out for AREF by Pricewater-houseCoopers – which aimed to pinpoint the problems unlisted funds experienced and recommend how they and AREF should develop in future – suggests learning from this experience could lead to new products.
The problems were serious for those many open-ended and closed-ended fund managers and investors who failed to anticipate the timing and severity of the market turndown between mid-2007 and early 2009; as PwC’s John Forbes said introducing the report, “real estate funds were subjected to a unique period of stress”.
Open-ended funds’ biggest problem was liquidity – with many investors wanting to redeem in a plummeting market. Though all the regulated authorised property unit trusts stayed open – as required by the regulator – many of the open-ended balanced funds did not. Some that did changed the pricing mechanism to increase the cost to investors of exiting funds. Meanwhile, a raft of closed-ended funds entered the down-turn after their investment periods were completed with high gearing and no way of drawing down equity to pay down debt.
Though the report says investors will make up their own minds about the decisions managers took or failed to take, and will place fresh capital accordingly, there remains a perception that decisions that might have been the best possible given the situation were poorly handled and communicated.
“There was a perceived lack of clarity as to how fund managers took decisions, resulting in a concern that arbitrary changes were being made,” the report says.
In addition, some investors said fund managers’ motives for closing funds may not have been pure: “Fee arrangements for open-ended funds reward the fund manager for maximising assets under management. The manager has a vested interest in maximising inflows and minimising outflows.”
The extreme step of suspending redemptions is, the report says, “a contentious area”. Even if a majority supported the decision, “it does not mean that all investors were treated fairly”.
PwC says AREF could have a role to play, both in producing guidelines or even standards about how redemptions work and exploring whether investors – particularly smaller investors – need independent representation to ensure managers are not conflicted (see recommendations).
Ian Mason, head of UK property fund management at Schroder Property and a panelist at the launch, was strongly opposed to any kind of representation that sought to take decisions away from fund managers. “Reputation is absolutely key and Schroders’ view is the fund manager is accountable; it is our reputation (on the line),” he says. “The decisions taken in 2008 were the hardest fund managers have had to take. Someone has to take those decisions. Investors wouldn’t have been there, nor would supervisory boards, to take them.”
Paul Oliver, principal of Curlew Capital, said one solution was appointing an investors’ “advocate” to attend key committees as an observer. “That seems a little cost to bear to make sure we don’t lapse back.” Panelist Paul Richards of pension fund consultant Mercer said: “That could be great. But the only downside would be the cost.”
The report points out that the aftermath of a period of great volatility is a “unique opportunity” for product development to meet investors’ requirements, particularly to improve the desire for liquidity. With many different types of investors – the panel highlighted just one, in the emerging switch in the UK from defined benefit to defined contribution pension funds – it speculates that “hybrids” will emerge, with characteristics of both open and closed funds.
However, both the report and Paul Dennis-Jones, fund manager at Pramerica and AREF chairman, suggest AREF is unlikely to be a source of much information here, as fund managers were jealously guarding their product differentiation secrets. “Several fund managers had undertaken their own exercises to identify lessons learnt, not all of which they were prepared to share.”
- Take a lead in training for IFAs in tandem with the higher IFA professional standards stemming from the Retail Distribution Review.
- Assist in standardising terminology for subscribing or redeeming from open-ended funds by producing an AREF glossary or adapting that of INREV.
- Give greater attention to the possible role of independent directors or advisers.