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UK property funds planned poorly for Brexit vote turmoil
[LONDON] Asset managers did not plan properly or have clear procedures for valuing their property funds under stressed market conditions such as those in the aftermath of Britain's June 2016 vote to leave the European Union, the UK's markets watchdog said on Thursday.
Several property funds were suspended after the vote as a wave of investors tried to pull their money out amid speculation that Brexit would hit commercial property prices.
The Financial Conduct Authority (FCA) examined the sector's responses and published its findings on Thursday, saying property funds should take external events into account as part of their planning for possible market squeezes.
"In general, authorised fund managers did not adequately plan, or have clear policies and procedures, for valuing their property portfolios under stressed market conditions," the FCA said.
"We found that the use of suspensions, deferrals and other liquidity management tools were effective in preventing market uncertainty from escalating further," the FCA said.
Firms could be clearer in their communications, including to end-customers, following significant market events, it said.
Some unit-linked or pooled asset providers "did not appear to understand fully the underlying portfolio of open-ended funds they were investing in."
All firms that suspended funds or made other changes should review how they responded to the Brexit vote turbulence.
"In some cases, individual firms will have to implement remediation measures to ensure they comply with our expectations and requirements," the FCA statement said.
The FCA said it was still looking at the broader issue of open-ended funds' investments in illiquid assets, including whether the rules need changing.
Cathy Pitt, a funds lawyer at law firm CMS, said the FCA's comments on communications and stress-testing of valuations gave a clue to the watchdog's (possible) actions.
Aberdeen Asset Management said it had adopted a cautious strategy in the months running up to the referendum, but the FCA review showed that lessons can be learnt across the sector.
"It's clear that a number of property funds should have had, as a precaution, higher levels of liquidity ahead of the EU referendum," Aberdeen said in a statement.
"We also agree that clear and intelligible communication is vital. We will be studying the FCA's report in detail to see if any further improvements can be made," Aberdeen said.
Within three weeks of the June 2016 vote, some seven funds had pulled down the shutters, leaving over £18 billion (S$32.091 billion) frozen in the biggest seizing up of investment funds since the 2008 global financial crisis.
Funds affected included those run by Columbia Threadneedle , Aberdeen Asset Management, M&G Investments, Aviva Investors, and Standard Life Investments.
UK-based open-ended property funds - meaning no restrictions on putting in or taking out money - had £35 billion invested in commercial real estate at the start of 2017, the watchdog said.