As the graph below shows, New Star’s International Property fund far outperformed other funds investing in international property as well as the market as a whole. With the FTSE All Share dropping 31.4 per cent in the year to 11 December 2008, a fall of 16.7 per cent by the fund appears to be rather successful.
Source: Financial Express Analytics
Since the launch of the fund, the underlying assets have fallen less than 1 per cent and as recently as September, the fund’s management team were eyeing attractive prospects in Europe and Asia Pacific. Such evidence does little to suggest that the fund was on the brink of having to suspend dealing.
Launched in June 2007, the fund was promoted as the first ever FSA-authorised retail fund able to hold international property in a tax-efficient way. By holding ‘Bricks and Mortar’ rather than investing in property companies the fund has benefited from a volatility of 11.67 per cent for the past year, compared with 34.89 per cent for Skandia’s Global Property Securities and 21.36 per cent for the FTSE All Share.
For this reason the fund had been very popular with investors. At the time of launch New Star had raised £206m, making it "the most successful independent UK retail fund launch of all time". A number of panellists in Financial Express’s Adviser Fund Index (AFI) have recommended this fund to their clients.
Prior to the launch of this fund international property was not an accessible asset class for retail investors. Sam Sibley of Beckett Invest and Justine Fearns of AWD Chase de Vere both cite the increased diversification of their property holdings that this new asset class could bring to their portfolios as reason to invest.
In contrast, Ben Willis of Whitechurch says: “We had made the decision to sell out of UK commercial property in January last year as we believed that the sector was over-priced and over-inflated. However, we still wanted the diversification attributes of ‘bricks and mortar’ property for our balanced portfolios. We had been given the heads up by New Star that they were looking to launch an International Property [fund] and we felt that there were opportunities in International Property, particularly Asia.”
Whether to diversify an existing property portfolio or replace holdings in UK property, this fund represented an exciting opportunity to enter into a new sphere of asset class. And investors and financial advisers jumped at the chance.
So, what went wrong?
As recently as October this year, the fund management team of the International Property fund wrote: “The New Star International Property Fund can choose, as a result of its relatively strong cash position, when and where to invest and benefit from weaker markets.”
Despite a reasonable cash weighting, the downfall of the fund has been its illiquidity. The fund simply did not have enough cash to honour the level of redemption requests that came in from those invested in the fund. The straw that broke the camel’s back was a few large redemptions from institutional investors.
In a conversation with AFI member, Charles Stanley stockbrokers, Stuart Webster, head of global property at New Star, was keen to assert that a ‘fire sale’ of assets would not be undertaken purely to meet these redemption requests. Therefore, the fund management team had no choice but to suspend dealing until assets could be sold at a fair price.
Beckett Invest’s Sam Sibley told Financial Express that her company believed the “fund seemed liquid enough with its cash and shares alongside physical properties but they had some chunky sums withdrawn and the liquidity was sucked out”.
AWD’s Justine Fearns suggests that the underlying cause of the problem goes beyond the intrinsic illiquid characteristic of property funds; she believes the problem originates with the fear factor surrounding New Star. She argues that the poor performance of some New Star funds led to a loss of faith in funds such as the International Property fund, which had been performing well. As investors hurried to withdraw their money, the liquidity issue kicked in.
Conversely, Charles Stanley stockbrokers said: “We do not believe that the redemptions from the International Property Fund are related to concerns about the group though we cannot rule out the possibility that retail investors may seek to redeem when given the opportunity to do so.”
AFI panellists agreed that problems with liquidity are always a potential issue with ‘Bricks and Mortar’ funds, but with 30 per cent liquid assets held in October, the New Star fund seemed well placed to cope with an above average level of withdrawals. It has been a shock to everyone how quickly the liquidity dried up.
Justine Fearns of AWD told Financial Express that they “did not see this one coming as the fund has been doing what it is supposed to do and performance has been good, even allowing for some investors who may have been banking profits”.
What next?
The problems at New Star Asset Management will, unfortunately, have a negative knock-on effect on the future prospects and sentiment behind this fund. However, there is no doubt that the New Star International Property Fund has performed well since its launch and has a competent and experienced team behind it.
Most AFI panellists are advising their clients not to panic sell. ‘Bricks and Mortar’ investment should never be about making a quick buck, investors need to remember that it should be viewed as a long term investment due to the illiquidity of the asset class.
When market sentiment is low, the popularity of illiquid investments will always reduce as investors are reluctant to see their money tied up in assets that are not easily accessible. The irony is that the ‘unique selling point’ of this fund, that retail investors could have access to direct overseas property investment, has become its downfall.
The UK funds industry faces ongoing market conditions that have not only resulted in assets under management shrinking for many, but also put pressure on asset management firms - resulting in a rise in M&A actitivity in the sector, with New Star being the most spectacular example to date.
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