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Immediate thoughts in the wake of the UK’s dramatic EU referendum

by
01 August 2016, at 1:00am

Dylan Jenkins looks at the instant effects of the Brexit vote and provides an update, and looks forward to what might happen with commercial property funds.

SO, THE PEOPLE WERE GIVEN THE CHOICE AND THEY HAVE CHOSEN. Conclusively. The coming days and weeks will likely be underscored by confusion, noise and opinion, all things we categorically know that markets do not like. 

Not only are we out of the European Union, but we are left with a brand new Prime Minister and no real certainty as to whether or not a snap General Election will be triggered.

The unprecedented fall of Sterling against the US Dollar and Euro as well as the significant initial falls of the FTSE 100 are indeed early signs of volatile times ahead. I have no doubt that you will likely want to know what the implications of leaving the EU are for your portfolio; especially given the particularly mendacious coverage being readily provided by news outlets.

But it is worth bearing in mind that for investors, all of this is opportunity as much as it is scary. I have always had a poster in my office – Russell Investment’s rollercoaster of investor emotions: we’re all on that rollercoaster right now and as tempting as it might be to cash out, it isn’t the answer. Volatility is always uncomfortable, but it does provide opportunity. As I write this, the FTSE 100 and other major European markets have all posted significant daily gains. 

It is also worth remembering that Britain is a small part in the global economy and this is often re ected in most managed investment funds. It is likely you will have holdings all over the world and in a number of different asset classes, which should help minimise the impact of the result.

I’m sure that more details will emerge over the course of the next few weeks and months that will hopefully allow the dust to settle somewhat. But in the event that you do nd yourself a little uncertain and afraid, this article should serve as a reminder that this is all part of the journey and that these short-term shocks are not symptomatic of the journey as a whole.

Update on commercial property funds 

Despite some early volatility, the investment market fallout from the UK’s referendum decision has been fairly benign.

Perhaps one of the more significant Brexit consequences to date was the decision taken initially by Standard Life and M&G Investments (and quickly followed by many other companies) to suspend trading in their UK property funds.

Both companies have blamed “exceptional market circumstances” which followed the result of the EU referendum.

Open-ended property investment funds, such as Standard Life Investments UK Property and M&G Property Portfolio, occasionally have to suspend trading when large numbers of investors ask to withdraw their money.

This is because property is a fairly dif cult asset to trade; the fund manager would not want to rush to sell large commercial properties to satisfy redemption requests, as doing so would disadvantage the other investors in the fund.

These are both funds valued in the billions and invest in commercial property across the UK, including offices, retail premises and warehouses. The funds also contain some cash and shares in property and land companies, which helps to manage liquidity during most normal trading circumstances. According to statements from both companies, these suspensions were “requested to protect the interests of all investors in the fund”.

It is worth noting that these property fund suspensions do not happen very often. The last time UK commercial property funds were forced to suspend trading was eight years ago during the global financial crisis, when redemption requests also prompted a brief suspension in redemptions.

Standard Life Investments and M&G have both decided to suspend trading after initially changing the pricing basis of their respective funds, effectively introducing a 5% penalty for investors selling their units.

Henderson and Aberdeen have also changed the pricing basis of their property funds in light of Brexit, effectively reducing the value of holdings by 5% for investors who choose to sell.

Standard Life Investments plan to remove the suspension as soon as practicable and will in any case review the decision every 28 days.

Within our financial planning business, we have a number of clients with holdings in many of the property funds that are affected and these actions have not given us any immediate cause for concern.

Any holding in a property fund is limited to a relatively small part of an overall investment portfolio, which means other assets are readily available in case urgent redemption is needed. In any case, our clients invest with long- term investment goals in mind, so will not panic into selling their holdings because of a bout of short-term market volatility or uncertainty.

Commercial property remains a sensible investment choice for some allocation within a diverse investment portfolio. It offers useful diversification, with its negative correlation to other investment assets. UK commercial property is still offering attractive yields relative to cash and fixed income.

Any investors concerned about the impact of the referendum result on their investments should of course speak to their appointed financial planner for further advice and support.