Property Fund suspends withdrawals and what this means for with-profits

It has been announced that the Standard Life Property Fund is currently suspending withdrawals from the fund, due to a high level of withdrawal requests from policyholders.

In its own right this is not especially alarming. Property funds which hold real tangible property within their structure are by their very nature illiquid.

It is simply impossible for the fund manager to sell the assets quickly.

So when many policyholders or fund investors in the fund want to get money out there can be a stress on the fund if it does not hold sufficient cash in the bank. Many funds will hold a reasonable cash balance but not enough to support widespread and immediate or unexepcted withdrawal requests.

It is “the nature of the beast”. However, although not alarming, it is a red flag. Why? Because it shows investors are nervous (of property in this case) and are looking to liquidate their positions, at least, to an extent. The crowd are often ahead of the game.

Second, it represents a ‘structural’ red flag, as it indicates the different nature of different types of fund and this is where this matter relates to with-profits funds.

Some funds, most funds, are inherently liquid, their underlying assets can be liquidated at the same speed and level as requests for withdrawals by fund holders. A UK equity fund, investing in UK shares, for example, is basically liquid; if you want your money out of such a fund, you will be able to get it, all other things being equal. Not necessarily at a decent price, you may have to accept a loss, if you are withdrawing in a falling market, but at least you know it is there.

With-profits funds tend to be more like a property fund, they are complicated by structural obligations which can mean that if some policyholders want their money out (and others don’t) they can quickly reach a position where there are inequalities being reached between different policyholders and not all will be treated fairly.

The manager or owner of the with-profits fund might then take action to suspend withdrawals or, more likely, impose penalties on those looking to withdraw, such as a Market Value Reducer, which is, in effect, an arbitrary reduction in value (i.e. not one which reflects a unit price).

In layman’s terms this means there is a very strong risk that you might not get your money when you want (or need) it or you will be able to do so, but at a reduced value. These penalties and their possible implications vary significantly from policy type to policy type. They almost invariably won’t apply or cannot apply on death if that is any reassurance.

The overriding point of this article, if you hold money in with-profits, is this: like property funds they are (normally) structurally arranged to prevent rapid or widespread investor withdrawals. Beware if you are in such a plan of this feature and, in this market, be prepared that this theoretical position could easily become a reality.

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