Covid-19 fears and the knock-on effects stemming the spread might have on the global economy are making it increasingly difficult to put a value on financial assets.
Market swings and great lurches in share prices have started to become daily occurrences, with market watchers hanging onto seemingly intra-daily updates on combatting the spread. The effect on shares has been enough to provoke the Financial Conduct Authority (FCA) into advising businesses to hold off on their quarterly reporting as it is likely to give a skewed view of firms’ performance so far this year. Placing a value on these assets, with respect to their current and future trajectories, is becoming increasingly difficult against an ever-changing backdrop.
The UK property fund sector is facing similar challenges, with many funds’ independent valuers advising they are unable to accurately value the properties within the portfolios.
As a result, a number of UK property fund providers have temporarily suspended dealing of shares in their funds. This means it’s no longer possible to buy or sell their shares.
How easy it is to buy and sell an asset (or its liquidity) is important at the best of times. And it’s especially important for assets held in an open-ended fund which provides a daily dealing point for investors.
If we look at the assets themselves, there’s a sliding scale in terms of how liquid they can be. Cash is the ultimate liquid asset because you can get the value from it instantly. Shares in large cap listed companies are also highly liquid because buyers and sellers will almost always find each other, with trading volumes normally high. On the other hand are assets that take more time, procedure or additional cost to buy and sell, like commercial property.
Property fund suspensions over the past few years have highlighted their specific challenge of having to sell assets quickly in order to fulfil redemption requests. If you need to sell under time pressure then the price you’ll get is likely to suffer.
That’s a problem if the fund goes through prolonged periods when more investors want to sell out of the fund than buy in. In more normal times those wanting to sell can be matched against new investors wanting to buy in so there is no need to sell assets. Even if there are a few more sellers than buyers, a proportion of the fund is held in cash to meet redemptions. But if selling is sustained and heavy, the fund may have to sell real assets. It’s difficult to sell part of an office block or shopping centre too, and the only pockets deep enough to buy them might have an eye on the bigger picture as well, making it all the more difficult.
Add in times like now when, even if it gets to that stage valuation becomes a hurdle, and those in charge of the funds can decide to take protective measures temporarily.
Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Funds in the property sector invest in property and land. These can be difficult to sell so you may not be able to sell this investment when you want to. There may be a delay in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer's opinion rather than fact. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.