Coronavirus Market Insight: Update 13th April 2020

One of our investment themes showing its benefit

Little has changed since our previous update as we start to see some continuity of expectations. I thought this would be a good opportunity to highlight one of the more specific investment issues that has raised its head as a result of the Coronavirus and how this has always been of a concern at Future Asset Management and how we mitigate it.

The previous updates have highlighted the investment principles that show it is currently not a good time to withdraw significant investments if they are not needed. However, the current situation could also cause some scenarios where some funds are required. Any investment should be considered as a longer-term commitment, however, if money is required and there is no other alternative, then it is needed, and that is why we are very firm on using liquid investment structures.

As a consequence of the pandemic, a significant amount of property funds had to freeze all withdrawals. This may seem heavy handed when it is indeed the investor’s money, but there are strong reasons as to why they have to do this. Firstly, they are unable to accurately value the property held within the funds; this is due to, 1) the unknown number of lost tenancies that may occur due to the pandemic, 2) the unknown length of lockdown, and 3) the difficulty of performing physical valuations at present. Without knowing the value of the entire portfolio, they cannot accurately determine the value of the clients’ holdings and how many units must be sold to meet their withdrawal request. This could result in unfairly remunerating some investors over others.

When there is a potential for significant withdrawals then the money has to come from somewhere. The investment managers of property funds generally manage this from cash holdings, incoming rents and new investments, however, at times when these are not enough to meet the withdrawals, properties would have to be sold. At present, I’m sure you can appreciate there is not a significant number of active property buyers and so any sale would be expected to be under its medium-term value. Blocking withdrawals during these times protects the remaining investors by preventing them from seeing assets sold under-value.

This concern isn’t new, so what do we do about it?

In many of our investment strategies we will look to hold no physical property assets; this may be due to the client’s circumstances needing greater and more consistent levels of liquidity, or, sometimes due to clients already having a significant part of their wealth exposed to property markets. For some investment solutions, property exposure can help provide some further diversification, income yield and inflation protection over the long term. In these solutions we ensure that the investment is not over exposed and has the ability to sell other assets to provide funds if required by a client. This is also why we would unlikely recommend an individual property fund to be held directly by clients.

As always, we are still here, still working and happy to take any queries you may have.