Aviva Investors has raised concerns over the FCA’s powers to take control of funds when they need to halt trading, following the regulator’s reviews into the performance of property funds in the aftermath of the Brexit vote.
More than £18bn of assets in commercial property funds, including those from Aviva, Standard Life Investments, M&G, and Columbia Threadneedle, were put on hold in the weeks following the EU referendum because of fears over falling property values and redemptions.
The action led both the FCA and the Bank of England to examine ways to restructure property funds to prevent market panic.
In a discussion paper, published a year ago, the FCA suggested various methods on how to improve the liquidity management of such funds. Among various proposals, such as enhanced disclosure or creating specific new tools, the FCA suggested its own direct intervention could still be the best option in some cases.
Direct action from the FCA could stoke fund manager fears that their reputation will take a hit if their firm is the first to be asked to stop a fund trading.
Aviva was the last fund manager to lift the suspension on its Property Trust in December 2017, allowing investors back into the fund five months after trading was closed.
Andrew Hook, the lead manager of the Aviva Property Trust, welcomes the FCA consultation and follow-up reviews, but says regulatory intervention like shutting funds can have “perverse outcomes”.
Speaking to Money Marketing, Hook says: “The FCA is looking at a range of different possibilities. We had sensible comments in our feedback [to the consultation].
“The only part we had a bit of an issue with was around direct intervention in the markets. I don’t think direct intervention by the regulator is in anyone’s particular interest. We don’t think that is healthy for the markets.”
Hook, who has co-managed the fund since March 2015, assumed the role of lead manager in January 2017, taking over from Mike Luscombe, who has since retired from the firm.
Before reopening the fund in November 2017, the managers avoided forced sales during the suspension period. Instead, they implemented a structured sales programme, selling 11 properties totalling £212m between the EU referendum and November with “prices achieved broadly in line with market valuation changes”.
Hook says: “Post [EU] referendum, we have seen people come back into these funds and become reinvested. The suspension period only lasted for a short while and I think it was absolutely the right thing to do for those funds. It was protecting investors’ interests rather than leading to a fire sale environment.
“I am very clear in my mind that asset managers acted in the best interests of their clients and that is what we have to demonstrate and do. The FCA has agreed on this and take that on board.”
Hook says investors moved back into his fund during 2017, despite the size of the fund shrinking to around £1bn as of November, down from £1.5bn at the end of 2016. Like most of the other property funds during 2017, the cash buffer
in the Aviva fund was built up to over 20 per cent to defend against another possible wave of redemptions. Investors were still wary of political uncertainties in the UK while it started its negotiation talks with Europe.
The allocation to cash and real estate investment trusts in the Aviva fund now ranges from 10 to 15 per cent, which is the same level of cash most property funds had at the time of the Brexit vote.
Overall, Hook doubts the FCA will introduce any drastic measures following industry feedback on its proposals. He says: “We do have an open dialogue with the FCA and it was with more frequency over the referendum and at the end of  that they came to see us and we had a very detailed discussion.
“We fed back our comments with their discussion papers and other studies they have sponsored. We wait and see what their response is, but I would be surprised if there is anything drastic in what they do. Certainly, the message we have received talking to our peers is that if we think that there is a case for further investor education we very much support that.”
The FCA discussion paper on illiquid assets and open-ended funds closed in May, with a further policy statement yet to be released.