With the FCA’s consultation on open ended property funds now well underway, there’s plenty of speculation about potential outcomes. Following the third widespread suspension of these funds in the last 12 years the FCA is seeking feedback on whether investors should face a 90 or 180 day notice period for redemptions.
There’s somewhere in the region of £13bn held in the suspended funds alone, and property funds in general are a fairly standard component of advisers centralised investment propositions (CIP), so the impact of notice periods can’t be under estimated.
Any CIP that uses model portfolios will have faced some challenges already if they included one of the suspended funds. Generally speaking, model portfolio functionality in platforms relies on the liquidity of assets to ensure smooth operation with the time taken to rebalance driven by the slowest moving line of stock. When a fund suspends, the complete lack of liquidity creates an obvious problem. Most platforms have interim solutions in place to allow model portfolios to continue operating but it’s not a long term solution and not without problems for advisers, clients and DFMs.
So, will the imposition of mandatory notice periods on open ended property funds solve the problem for those running model portfolios? In short, almost certainly not. Whilst 90 or 180 days provides liquidity, it’s nowhere near liquid enough to make a model portfolio work efficiently. A ‘typical’ open ended fund has a midday valuation point so the longest a deal waits to be placed is 24 hours and it could be as little as 15 minutes depending on when it’s submitted, with the value of trades generally known within hours when the electronic contract notes are received, meaning the final step of a model portfolio rebalance can usually proceed the following day. Adding 90 or 180 days to this process would be unworkable.
This logically means that advisers and DFMs wanting to access property as an asset class will have to find alternatives, most notably ETFs and investment trusts. This though will potentially create another set of issues.
It’s no secret that access to ETFs in the retail platform market it patchy at best, with some simply unable to offer them. Whilst there’s many that do offer access to them, there’s then the question of whether it’s actually viable to use them. For most that do, dealing is generally outsourced and executed once a day, which arguably loses some of the ‘essence’ of the products. Then there’s the dealing charges, transaction fees and broker commissions which all add additional cost for the client that they generally wouldn’t have faced when using open ended funds. The situation with investment trusts is much the same, if not worse. Through my work, I meet a lot of DFMs, and anecdotally, there’s many who are selective about which platforms they’ll use to make strategies that include exchange traded instruments available, even where the platforms can theoretically handle them.
For me, platforms should be a neutral enabler of investment propositions rather than the limitations of the platform defining the investment proposition – this is a very real risk for those advisers using platforms that don’t offer access or at least viable access to ETFs or investment trusts as they simply won’t be able to access a mainstream asset class. This will also be exacerbated where advisers use multiple platforms, with the ‘same‘ investment proposition now becoming materially different across them.
Whilst adviser usage of ETF and Investment Trust usage has increased greatly over the last decade, Unit Trusts and OEICs are still the dominant vehicle in the market. For those who haven’t previously used ETFs and ITs, running their own model portfolios, they will now need to consider the potential additional costs and risks to cover this. Obviously advisers will have a broad understanding of these products but they won’t necessarily be aware of the practical nuance of how they work in a portfolio and how their processes may need to be adjusted to research and manage them. For those running advisory models, this is another complication to accommodate in addition to MiFID and PROD.
With the funds still currently suspended and the FCAs consultation process ongoing, it feels like a good time to start reviewing CIPs, so that advisers can act promptly when the situation becomes clear.
Our proposition is built around the ethos of enabling adviser’s investment propositions, whatever they may be. If your answer to this challenge is to start using ETFs or Investment Trusts, there’s a number of way we can support you:
- Our unique in-house exchange dealing capability allows you to access the whole market and trade them properly. We also don’t charge dealing fees so your clients won’t be burdened with an additional layer of costs.
- You can access an extensive and growing list of DFMs if you decide to outsource investment management
- We work with a number of DFMs who are also able to support your in-house investment propositions, be that building custom model portfolios for your firm or providing specialist expertise for your investment committee
- Our streamlined bulk re-registration process allows you to move clients to an environment where you can viably manage these investments.
If you’d like to find out more about how we can help support your investment propositions, please get in touch with me or your Ascentric Business Development Manager.