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The regulations that set the borrowing restrictions for Non UCITS Retail Schemes (NURS) (COLL 5.6.19R (5)) stipulate that:
"not more than 20% in value of the scheme property is to consist of immovables that are subject to a mortgage and any mortgage must not secure more than 100% of the value in COLL 5.6.18R (4) (on the assumption the immovable is not mortgaged)";
We understand that these rules are intended to facilitate liquidity in a fund where it is intended to sell assets quickly to meet redemptions. The disadvantage of securing loans at a higher loan to value over a smaller number of assets is that it increases both default risk and borrowing cost. The provisions in COLL make no sense for a fund that does not intend to sell assets at short notice to meet redemptions. The consultation recognises that:
a) Selling assets at short notice in stressed situations is only one course of action for daily dealt funds and the implication in the consultation is that this may not be the preferred option;
b) Limited redemption funds will not face the pressure to make distressed sales of assets.
We believe that it is more appropriate for managers to set determine appropriate mortgage arrangements within the 20% limit to match the liquidity plan for the fund.
Industry responses
John drafted the Investment Property Forum (IPF) response to the consultation and contributed to the Association of Real Estate Funds (AREF) response.
The AREF, INREV and IPF responses to the consultation all backed the proposal that John made in his report in April 2017 on redemptions in open-ended funds following the EU referendum result that a mechanism for deferral of redemptions in open-ended funds should be introduced.
If you wish to see the submissions, you will need to contact the organisations directly.
Dual priced funds
In this section of the blog, we consider two recent devleopments, firstly some announcements by funds, and secondly an FCA discussion paper published in May 2019.
Developments in funds
On 14th February 2019, Janus Henderson announced changes to the pricing of units in its UK PAIF. The the fund will now price subscriptions and redemptions on a fixed dual price. If you want to read the detail (in a very thorough explanation), you can find it here. This is a relatively unusual pricing approach for UK open-ended funds. Most of the open-ended retail funds operate arrangements where pricing moves from bid to offer depending upon net flows. At the time of the EU referendum, one fund manager with a large and successful fund was already operating a fixed dual price model where investors always subscribe at subscription price and investors always redeem at redemption price. In both models some or all of the funds from subscriptions are being used to fund redeeming investors rather than to acquire underlying assets.
On 3rd April 2019, Columbia Threadneedle announced that it was also moving the subscription and redemption pricing for its UK PAIF to a fixed dual price.
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