Part of the reason for taking the time to collect one’s thoughts and post them to a wider audience three times a week, is as a record for times like these. This week several managed property funds issued gates preventing investors withdrawing their cash from the fund, in part as a result of comments made in the Bank of England’s stability report. For those who are less familiar with the structure of an opened ended investment fund, the principal is fairly simple. When an individual by units in the fund, in theory the manager invests the money and holds the assets in the fund. Then when you want to raise back the cash the fund manager goes and sells the assets and returns the cash. In practice the fund holds a cash buffer for any possible redemptions, the problem comes if a lot of investors want to redeem at the same time and the underlying investments are illiquid. Large buildings for example, the cash buffer runs out quickly. Hence the need for the gate.
What caused this run on commercial property funds, apparently fear that an asset that was so loved a few weeks ago, is now feared post the Brexit vote. More liquid assets, such as stocks can also suffer at these times as investors look to raise cash from these more liquid assets.
One may ask why is a tradeable asset such as a unit trust, invested in illiquid untradeable assets? That may be a debate for another day, but it is more than likely those encouraged to invest in these funds were not made aware of the possibility of a gate being put in during times of stress. The papers probably don’t help by drawing comparisons with Lehman and 2008.
Art times like these one wonders what Warren Buffet would be doing, in reality who knows but history and his philosophy suggests he looks to times like these when panic is taking over as opportunities to be taken advantage of. We often quote market sayings that serve us well at these times. “Sell when you cannot when you want to” comes to mind at this point. We can also remind ourselves of Warren Buffet at these times, “when others get fearful I get greedy”.
The Brexit vote as cast shadows across the world, including the Federal Reserve minutes. Voting members expressed the view that rates should remain on hold until the effects of the Brexit vote is known. Two year US treasury bond yields fell to 0.59%, the lowest this year as markets appear to reduce the odds of another hike this year. Later today we get the latest non-farm pay roll data, unemployment rate and average hourly wages. A stronger than expected report will put the Fed back into a tricky position, if they were not there already.