Our head of funds research Dzmitry Lipski gives his take on the latest property funds saga.
It was a case of déjà vu for investors and commentators alike on the news that within just a few days, Aviva's UK Property fund has gone the same way as Kames Property Income fund and the Janus Henderson UK Property PAIF fund – all suspended as a result of uncertainty over property valuations amid the coronavirus-linked malaise in global markets.
This kind of contagion was last seen in 2016 when several property funds were suspended following the 2016 UK EU referendum vote and comes just a few months on from M&G Property Portfolio in December 2019.
Dzmitry Lipski, Head of Funds Research, interactive investor, says: “History does repeat itself and questions again how appropriate open-ended funds are to gain exposure to illiquid asset such as property.
“While most funds provide daily dealing, some underlying holdings often take much longer to sell and therefore need to hold cash positions for liquidity reasons, to meet redemptions or to manage large inflows.
“While this is a short-term illiquidity issue for open-ended funds, long-term investors who have a well-diversified portfolio, and do not need short-term capital or regular withdrawals, should not panic.
“Nevertheless, going forward, the penny should now be dropping: closed-ended property funds are the better choice as they offer greater liquidity via daily trading. Due to their closed-end structure, investment trusts can be fully invested without concerns over liquidity.
“But investors should also be aware that while closed-ended property funds do offer greater liquidity, it sometimes comes with larger drawdowns as their prices can be influenced by external factors other than actual property valuation. Discounts will likely be in for a volatile ride, and gearing can also hurt in a downturn, but the structure means managers can take a long term-view and investors can get out if they absolutely need to. And for anyone brave enough to buy – they can.”
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