Before reading this column, remember your ISA, pension and investments are managed by ‘someone’.
That someone, believe me, doesn’t always manage the money well, as the performance comparison showed last week in relation to the best and worst performer over the last twenty years for a pension pot.
From the year 2000, for a pension pot of £100,000, the best performer had returned over £950,000 more than the worst performer.
When your pension/investment fund manager builds your investments, they split between assets that balance each other out (negative correlation) such as property and stocks shares/equities. It’s the seesaw affect.
Whilst one might fall, if the other is negatively correlated, you have the balancing out effect.
Property investment is not immune to market fluctuation
Whilst property is a negative correlation generally, nowhere was immune to the impact of the Covid downturn.
Fixed assets (not liquid cash) struggled and in particular, those who were invested in property within Open Ended Investment Companies (an OEIC – check which you have). Such assets have the most peculiar self-designed suicide button.
If you decide you want access to your cash from such a fund, you look to encash, but the manager has to protect the remaining investors.
If there is any form of panic, forced sellers cause mayhem in property investment funds, which is not noticed elsewhere. Such funds are priced daily and traded daily in terms of their share price, but the assets can have wildly fluctuating values particularly if investors want them quickly. Such fluctuations are not immediately available.
Moreover, if investors are looking to sell out and a manager has to sell to raise the cash, the underlying values plummet. Basically, the buyers all know the sellers have to sell.
When an investor seeks access to their cash and your money is still invested, you could become the loser, therefore triggering the wildebeest moment.
Real Estate Investment Trusts
Not suggesting Real Estate Investment Trusts (a different vehicle to an OEIC) are the alligators in the river, but with the ability to borrow cash, they can then buy up such distressed assets.
As investors look to encash, the fund manager uses what cash they have, the most liquid assets are sold next (often the better ones, but they are liquid and saleable i.e. there are buyers) and remaining investors are now left with a bag of illiquid potentially poorer quality assets.
All of this has to change if it’s to be an efficient market. In reality, most investors do not normally rush to the door, only doing so because they don’t want to be left in town with no taxis.
The FCA have shown that 40% of transactions can take over eight months to complete. On top of this, you have aborted transactions i.e. they don’t go through for whatever reason, so its back to square one for the sale.
And so the fund manager has to ‘gate’ or suspend the fund, which has happened in abundance with property investment funds in the seemingly endless stressed conditions of the last few years.
The unintended consequence is that property values as a whole take a colossal valuation hit, much of which is indiscriminate of the quality of the assets real value.
When this is added to ‘Covid panic’ alongside ‘working from home’ expectations, valuations have seen an even greater downward pressure.
The move to have a 180-day notice period for investors in property funds might be considered a nuisance. In reality, it is actually no use at all.
Property funds and German efficiency
The UK investment market should follow the German model and have a year-long block.
Any less, encourages investors in panic scenarios to be the first at the end of the 180-day queue with their money, and get in quick to sell out.
A year-long notice period allows time for the manager to sell out, and then pass on the proceeds, and also not create the unintended price drop.
This creates a market efficiency we will all benefit from, and also maintains the status and purpose of a property in our portfolio of being a negative correlation.
Is property down valued, will offices ‘never be used again’, or will it create a buying opportunity?
I will cover that next week.
About the author
Peter McGahan is Chief Executive Officer of Independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority.
Read more posts by Peter McGahan.Last modified: February 23, 2021