The news today that Neil Woodford’s equity income fund is to be wound up following its suspension in June is no great surprise. What is more eye catching is the crash in value from £10bn to £3.5bn, due to a mixture of withdrawals and poor performance.
Whilst Woodford’s fund is not a real estate based fund, the June suspension of the fund will chime with those investors in property funds such as Standard Life, Aviva, M&G and Henderson that were “gated” in 2016 after Brexit.
At the end of September, the FCA published its new rules affecting “non–UCIT retail schemes” which include retail property funds. These new rules are intended to protect retail investors investing in funds holding illiquid assets such as property, which cannot be disposed of in short order. The new FCA rules come into force in September 2020 and will include:
• Categorising such funds as Funds Investing in Illiquid Assets;
• Requiring Funds to outline liquidity plans in investment memoranda; and
• Requiring Funds holding real estate assets to suspend dealing where there is “material uncertainty” about the valuation of at least 20% of the Fund’s property.
The new rules are to be welcomed as an additional tool to protect investors. However, the crash in value of the Woodford fund has highlighted the fact that “valuation” is an art and not a science, and over optimistic valuations can leave investors high and dry. The new FCA rules do not include a definition of “material uncertainty” and the FCA explicitly ruled out including such a definition.
FCA regulated Real Estate funds, whether promoted to Retail or Professional investors are required to have their real estate assets independently valued at least annually by RICS accredited valuers. RICS valuers are required to value real estate assets according to the standards laid down in the RICS valuation bible known as the “Red Book”. However, the Red Book does also not define “material uncertainty”.
The GFC and Brexit have highlighted how quickly valuations can move after macro-economic shocks and also how fund managers and valuers have short memories of such events in stable or improving markets.
Next week may see a Brexit deal, let’s hope that valuers don’t forget we live in cyclical economic times and assume that the bull run will stampede forwards. Investors need sane and level-headed valuers who can stand up to “bullish” fund managers.