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Whilst yesterday marked the fourth anniversary of the EU referendum vote, provoking a lot of bloggage by those focussing on politics, today marks the anniversary of the start of the market turmoil that followed, hence our contribution. We do produce polemics on the stupidity and futility of Brexit too, but not on this occasion where our focus is on the open-ended property funds in the aftermath of the referendum result and what has happened since. As most of you are no doubt aware, we undertook the independent review of fund behaviour after the EU referendum for the Association of Real Estate Funds. It was published in April 2017, and you can find it here.
On the day of the vote four years ago, both Sterling and the FTSE 100 had risen to 2016 highs in anticipation of a “remain” vote. After the result became clear, and the markets opened on the 24th, Sterling fell to from $1.50 to $1.38 its lowest level since 1985, falling again the following Monday to a new low of $1.32. The FTSE 100 also opened very substantially lower, although it recovered during the day and subsequently. Shares in companies with a predominantly UK source of income, including the various UK REITS were particularly hard hit and did not enjoy the same level of subsequent recovery. By midday on the 24th June, the prices of the UK’s largest four REITs were down between 12% and 20%. Some of the smaller REITs had been hit even harder.
Most of the UK daily dealing open-ended property funds for retail investors faced significant levels of redemptions on the morning of 24th June prior to the midday dealing point. Although there was speculation at the time that the fall in the value of REIT shares was caused by open-ended funds offloading shares to meet liquidity requirements, this does not appear to have been the case. Many funds had been holding REIT shares as part of their liquidity management but in most cases these shares had been sold prior to the vote, protecting investors in the funds from the impact of rapidly falling share prices in the immediate aftermath of the result.
Those funds that were still holding shares and had to sell them to meet liquidity requirements did so at a price significantly lower than was available prior to the vote, but this was after the month end rather than on the 24th itself.
Then what happened?
The most immediate reaction of fund managers was a recognition that the valuation of the underlying assets was lagging the sudden market drop. Henderson was the first to move, adjusting the pricing at which investors could redeem units in its retail fund by making a reduction to asset value from immediately after the midday valuation point on 24th. This was applied to redemptions submitted in the previous 24 hours so that all investors who submitted redemption notices after the referendum result was known were subject to the adjustment. Other managers followed over the next few days.
Although there had been a flurry of redemptions from funds on the morning of the 24th, this had abated by the afternoon.