14
INVESTMENTOUTLOOK
THE BRANDEAUX FUNDS
Some recent developments in the purpose
built student property sector have been
instructive. The Brandeaux Property Funds
suspended both redemptions and any new
investments into the funds on the 1st July
2013.
These were open-ended UCIS schemes
investing in purpose built student
accommodation and it appears that this is
a liquidity issue, i.e. they do not have the
liquidity to honour redemptions.
Brandeaux have cited uncertainty around
the student accommodation market and
the new restrictions on the promotion of
UCIS as the reasons behind the suspension.
This is worth examining further as there
are a couple of instructive points worth
drawing from this:
ISSUE #1: LIQUIDITY
There are three ways to create liquidity
1/ Have a massive pool of cash. This is
usually too inefficient for most funds to
consider as holding that much cash would
be a drag on performance.
2/ Sell the underlying assets to raise cash.
This is difficult with property as it is an
illiquid asset that can take a long time to
sell and transaction costs can be high.
3/ Match buyers and sellers. This is fine, as
long as there are similar numbers of buyers
and sellers. Once there isn’t, there may
be a liquidity problem and this appears to
have been the difficulty for Brandeaux.
One way of managing this is to have a
closed-fund. This is essentially option 3,
but the market sets the price. Investors buy
and sell shares in the fund, based on their
assessment of what a share is worth. This
creates liquidity in the same way the stock
market is liquid, there will nearly always be
buyers at the price the market thinks is fair.
However, it is worth noting that you could
still have a problem if the market doesn’t
think your units are worth very much.
Yes you can sell, but not at the price you
want. So you do have liquidity, but you can
still suffer a catastrophic loss. A focus on
liquidity doesn’t resolve this problem!
A key take away for advisers and
intermediaries would be to ensure that
your clients have a good understanding of
liquidity risk. When your clients say they
understand that an investment is illiquid,
do they really know what that means?
It may be worth drawing their attention
to the points made above and examples
similar to Brandeaux.
ISSUE #2: VALUATIONS
Open or closed, investors rely upon
trustworthy valuations of the underlying
assets to tell them what their investment
is worth.
Hypothetically, if a fund manager arranged
their own valuations they could inflate
them, give the impression of good
performance and pay any redemptions
from new investments. This would only be
discovered once new investments dried up.
The key take away for advisers here is an
insistence upon independent valuations
to ensure that you are not looking at
something that only really amounts to a
ponzi scheme. This would form part of
your due diligence process when selecting
suitable funds for your client base.
ISSUE #3: REGULATION
This is a more opaque point, and again it is
hypothetical: what if the Brandeaux funds
have been performing excellently, but the
new UCIS regulations have meant that new
buyers have dried up and so there is no
liquidity?
Current investors would now no longer
have the liquidity they need to exit, and
new investors do not have the opportunity
to invest in a good fund. This could be
considered an unintended consequence of
the new regulation.
In reality it will probably be a price that
the FCA view is worth paying, if that’s
what it takes to keep retail investors out
of unsuitable funds. The occasions when
the regulations actually lead to missed
opportunities for investors will hopefully
be few and far between. However, it
does show how regulation is a blunt tool
that can distort markets and it would be
unfortunate if investors in these funds
suffer losses and regulation is the culprit.
The funds that were impacted by this suspension were:
• Brandeaux Student Accommodation Fund (Sterling) Limited
• Brandeaux Student Accommodation Fund (Multi Currency) Limited
(the “Student Funds”)
• Ground Rent Income Fund Limited
• The Ground Rent Portfolio Limited
• Ground Rent Portfolio Plus Limited
(the “Ground Rent Funds”)
• Brandeaux Dual Asset Fund (Sterling) Limited
• Brandeaux Dual Asset Fund (US Dollars) Limited
• Brandeaux Dual Asset Fund (Euro) Limited
(the “Dual Asset Funds”)
(and together the “Brandeaux Funds”)
IMPACTED FUNDS
