Clerical Medical Property Pesion Fund

Agg

Can anyone help me with information about the re-valuation of this fund. I have got £40K invested in this pension fund and this mronignI have just found out that they "re-valued" the price of the units in the fund at the end of December. Essentially they reduced the price by 20%. Has this reduced my holding value by 20% as well, i.e. have I lost £10K!!??!!

They have never written to me to tell me they were going to do this or to let me know they have done this.

Its Saturday, so I can't call them to find out and I can't find any other detailed info on the net about it.

Can they really just wipe out £10K from my pension fund just like that.

Hope someone can set my mind at ease.

cloud_dog

Agg wrote: »

Essentially they reduced the price by 20%. Has this reduced my holding value by 20% as well, i.e. have I lost £10K!!??!!

No, it means your value will have decreased by 20% - £8k

Property is not a liquid investment and therefore the re-valuation of their holdings (investments) is only likely to take place annually or perhaps bi-annually; hense the sizeable downgrade in one go.

Having said that if your investment had been purely in proprty stocks (for example Brtish Land) then I'm sure it to would have dropped by at least 20% over the last 12 months.

cloud_dog

EdInvestor

It's usually best not to invest in one asset class (eg property) or one fund on its own, as this concentrates risk, with all your eggs in one basket .Having said that, many asset classes are currently going through a difficult patch.

As you are a long term investor however this volatility doesn't really matter as the price will recover later. It's probably best just to do nothing, but if you are making regular payments into the pension, divert the new money into a different asset class ( eg UK equities, where you can currently "buy cheap".)

You can then look at rebalancing the entire fund when the property fund has recovered.

dunstonh

They have never written to me to tell me they were going to do this or to let me know they have done this.

Why should they? unit linked funds have a daily value. Stockmarket funds are down between 10-25% in the same period.

2007 was not a great year but you get these every now and then. Clerical Medical had 16 odd years of continuous double digit growth so you cannot complain about a negative year after all that.

jamesd

Agg, this is nothing to worry about unless you're retiring within a year or two. If you're retiring in the next three months it is bad news and probably will be a loss for you.

The property inside property funds needs to have valuations done from time to time, just like homes that are being valued prior to sale. Since people have been selling property funds recently, property funds have been selling properties recently to raise the cash to pay the people who are selling. That has caused a decline in the prices of commercial property. That in turn results in reduced valuations for the existing property in the funds because they have to be priced on current prices.

This is largely irrelevant for those who have long-term growth objectives for property funds they hold; it's a good thing for people who are buying property funds at the moment and it's a very bad thing for anyone forced to sell now. For those who aren't forced to sell now, now is probably a bad time to choose to sell, though there is talk of a possible recession that could make things even worse for those selling and even better for those regularly buying for the long term.

If you're not retiring soon, just relax and ignore it. If all of your pension money is in commercial property you should be changing that by putting new money in other areas so your exposure to ups and downs isn't so concentrated in one area. And once there's been a clear recovery of property prices you might consider moving some out to other areas for a better balance. But now doesn't look like that time - it's way to likely to be near the lowest price and a classic victim consumer situation of selling at the bottom and making lots of money for the pros who buy from the consumers and profit during the recovery.

Have a look for "property vulture funds" and you'll find stories of new property vulture funds being formed. Your paper losses are the meat that those vulture funds are looking to consume and profit from if you make them money losses by selling.

For others, buying into those vulture funds might be a good move... but you already own the property so no need for you to buy more right now.

Agg

Clearly I don't understand this as well as you guys do, however this is the way I see things.

I have been tracking the price of the fund for a number of years every Saturday morning and the graph of the unit price has been growing in a straight line at an angle of 30 degrees, without change. If the sector has been underperforming, how come the price of the units has not reflected this and how come whoever values the unit has decided to constantly increase the price of them?

Also, as recently as 30th November last year, in the fact sheet for the fund, Clerical Medical said that, although the sector was moderating, it had still grown by 12.4% from June 2006 to June 2007. Obviously past performance is no guarentee of future performance, but how come a 12.4% growth has gone to a 13% decrease from June 2007 to December 2007? And why were they telling investors about this growth on 30th November 2007 yet on 19th December they issued a press release saying they were re-valueing the fund price 13% lower. (and changing from an offer to a bid price, generating a further 6% reduction).

And, with regard to why should they write to me to tell me about this.....

Although dictated by valuation of the sector, someone within the company would have sat down and planned that they were going to re-value the fund price on an arbitary date. i.e. one day my fund was worth £39K, the next day it was worth £31.5K. This was not a gradual reduction, as I would expect in an open market, it was a sudden drop which was not directly brought about by a sudden change in the market on that particular day. It was actually someones decision to do it. In these circumstances I would expect someone to tell me it is going to happen so that I have the option to take my £39K and move it elsewhere before the revaluation has been done.

If memory serves me correctly, when there is going to be a change such as this on the stock market, as happened with Shell a while ago, I was told well in advance what was going to happen, when it was going to happen and how it was going to happen. Also, in those circumstances, I was told that (as an example) for every share at X old price, I would get 1.3 shares as Y new price. So, in other words, they revalued the shares but I did not loose out because I got more shares ablbeit at the new lower price.

I am certainly hoping that Clerical Medical have done a similar thing with this investment and that the re-valuation is just to the unit price and not the overall value of my "account" with them.

As this is a pension investment, I had hope it would have been more protected from this sort of fluctuation than normal share investments.

I do understand that a pension is a long term investment and that I should not worry too much in the long run. However, the major cause of my anger with this is that it appears to me that the historical price of the units has not been shaped by the actual performance of the market and that the decision to change the price on the units was made by a person (i.e. pre-planned) and not by the market and that they can do this without consulting with the people who actually have their money in the fund. If they can do this now, what is to stop them doing it again at a date closer to the one when I do retire?

dunstonh

I have been tracking the price of the fund for a number of years every Saturday morning and the graph of the unit price has been growing in a straight line at an angle of 30 degrees, without change

That may be correct for the period you monitored it but if you went back further you would find similar drops occurred prior to the last house price crash (i know house and commercial is different but the things leading up to it are similar).

If the sector has been underperforming, how come the price of the units has not reflected this and how come whoever values the unit has decided to constantly increase the price of them?

The yields started to look unattractive last year. Mainly due to interest rates rising and giving a higher rate than the yield. Institutional investors started taking their money out to look for higher yields and the outflows started to exceed inflows of cash. So, the unit price gets reduced when that occurs. The early drops were purely because of that. However, the last couple of drops have been because the values of the properties have been reduced.

why were they telling investors about this growth on 30th November 2007 yet on 19th December they issued a press release saying they were re-valueing the fund price 13% lower. (and changing from an offer to a bid price, generating a further 6% reduction).

As you say, past performance is no guide to the future. Factsheets show past performance and a manager opinion as to future.

I would expect someone to tell me it is going to happen so that I have the option to take my £39K and move it elsewhere before the revaluation has been done.

Why? Its your responsibility (either your own or combined with your adviser) to keep your investments reviewed. Investors for the long term will just see this as a short term correction and ride through it. The fund manager is not your personal investments manager. He/she doesnt know your aims and requirements.

If memory serves me correctly, when there is going to be a change such as this on the stock market, as happened with Shell a while ago, I was told well in advance what was going to happen, when it was going to happen and how it was going to happen. Also, in those circumstances, I was told that (as an example) for every share at X old price, I would get 1.3 shares as Y new price. So, in other words, they revalued the shares but I did not loose out because I got more shares ablbeit at the new lower price.

Completely different thing. That was a share split. Do shell write to you every day telling you how much their share price has changed? No and you wouldnt expect it.

I am certainly hoping that Clerical Medical have done a similar thing with this investment and that the re-valuation is just to the unit price and not the overall value of my "account" with them.

No. You hold the same number of units but the unit price is down about 16%

As this is a pension investment, I had hope it would have been more protected from this sort of fluctuation than normal share investments.

Pensions have the same investment funds available as ISAs, unit trusts, bonds etc. Its up to you or your adviser to make sure your investments are suitable for the level of risk you take. The pension tax wrapper has nothing to do with it.

Commercial property is low/medium in risk. This is reflected by the lack of volatility over the long term. However, it doesnt mean there wont be short term fluctuations.

However, the major cause of my anger with this is that it appears to me that the historical price of the units has not been shaped by the actual performance of the market and that the decision to change the price on the units was made by a person (i.e. pre-planned) and not by the market

The actions of the "market" has created this.

and that they can do this without consulting with the people who actually have their money in the fund. If they can do this now, what is to stop them doing it again at a date closer to the one when I do retire?

We knew it was coming and had been for a few years. It was just a case of when and how much. It can happen again and probably will a few more times yet. Equally when the inflows start beating outflows again expect the unit price to move back upwards.

I had clients with about 2 million in CM property last year and took them all out in October. The information was available to make those decisions. We suffered a couple of drops but managed to get out in the 5.20s which is not far off the high points in August. However, its better than the 4.12 that it is now priced at. Ironically, I am now contemplating moving back in to property as value is now there for long term. It may be a month or two yet but not far away. There are still some external factors which could delay that decision.

No-one can predict the future price. It appears you have been sucked into the belief that property only goes up. That is not the case. It is not risk free and the unit price will fluctuate daily.

When an investment goes on so long without a loss the perception of risk gets dulled (look at with profits endowments or mortgaged buy to let properties as other examples of that. Tech stocks is similar albeit in a shorter timescale).

Agg

Thanks for your reply and more appreciated by the fact that you clearly know the fund in question very well. I have learned a salient lesson here.

However, may I ask, when you say the information was available with which to make a decision, where do you mean? Was it information specific to the fund or was it general market and sector information? I ask because I want to make sure I don’t get caught out again.

I had thought that by keeping an eye on the unit price and graphing it up I would have been reviewing the situation well enough and that if things started to look shaky that the graph would reflect this.

Or, are you saying that if I had kept a closer eye on the commercial property sector (as you could say I should have done with nearly £40K tied up in it) that I would have seen the writing on the wall and switched without anyone having to tell me so.

You are right, I do not expect Shell to write to me every day telling me the daily price of their share. I do however expect them to tell the world if they think something has or is about to happen which may cause a major move in the price. After all, if they don’t, is this not insider trading.

I have not seen anything in any of the literature about this fund that says they can do a re-valuation of the underlying property just like that, with no notice, but clearly they can. Maybe I don’t understand the sector as well as I should have done.

I take your points on a lot of these issues. I do however think it’s a tad harsh to say I was sucked into the belief that property never goes down. I was well aware that it does long before this weekend. However, does this not usually happen gradually, rather than with a bump on a arbitrary date, or do the people that do this not have to tell the world that they are about to do it? It is however fair to say that I was dulled to the risk because of the performance shown by my graph.

I do value your comments because, as I said above, you clearly know this particular fund. I am not shirking my own personal responsibility, I’d just like to know what I need to do to review investments like this more diligently and make sure I don’t get caught out like this so easily again.

jamesd

The information was general market and sector information and it's been really prominent in both financial and mainstream media for some months, even making headline news on the TV from time to time, notably when some other funds made similar changes in the earlier part of autumn. I'm no professional but I stopped mentioning here the possibility of investing in commercial property funds for stability around the end of 2006 and start of 2007 because the signs of a possible significant drop were around then. If I recall correctly dunstonh was also starting to be more negative around that time for new purchases.

Property valuation schedules vary. Sometimes annual, sometimes every six months or quarter and now some funds, the ones concerned with greatest fairness, are using monthly valuations. There's no need for the expense of frequent valuations when prices are moving slowly but when changes are rapid, the valuations must also be more rapid. You can expect that every property fund allows variable valuation schedules based on market conditions. All of them will also have provisions for delaying sales because it takes time to sell property and you don't want to be forced to sell into a dramatically falling property market.

You seem to be missing one key the point about the valuations: the properties had already dropped in value. The valuations didn't change this, they just made the loss visible and stopped people selling from taking more than their fair share of the value of the fund out when they sold.

To see why I wrote more than their fair share, consider a property fund that starts at 100 and drops in value by 1 a week and starts out with two revaluations a year. Someone who sells just before the next valuation will be able to sell after 26 weeks of drops in real value but before the price has shifted from 100 to the true current value of 74. So them getting out at 100 is taking more value out than the real value of the property their share of the total units owns. So the fund switches to monthly valuations. Now the greatest difference between real and listed valuation is much lower, only between 96 and 100 instead of between 74 and 100. People selling can still get more money out than the true value of their units but the difference is much reduced.

When it becomes even more of a problem the fund can delay redemptions, preventing people from selling until after the next valuation so it's impossible to get out with more money than the value of the property at the time you sell.

When property values are rising you get the opposite effect: buyers get property more cheaply than it's current value.

It's not you or the fund manager that this is protecting: it's everyone who owns the fund units. The valuations cost money, so doing them too often is bad, but it is necessary to do them more often to stop people taking out more than the actual value.

The biggest criticism of this fund could be that it should have done this sooner, before the drop was so large. By waiting it's let more people get out with an unfairly high share of the value of the fund. But the fund managers know how many people were selling and if it wasn't many, waiting a while was OK.

As you suggested, you didn't understand the sector as well as you could have and you should really have been monitoring market developments better if you don't like unpleasant surprises. Though since some markets can drop 20% or more in one day's trading, there's no absolute protection anyway. Commercial property is less volatile than that, generally speaking, and is still a good long term choice for stability. When compared to equities and their far more rapid movements.

The change to lower bid pricing can happen daily and routinely does happen depending on the daily balance of buyers and sellers but the change is far larger for property funds than others because the costs of selling property are far larger and those selling have to pay the real cost of selling rather than leaving the cost with those who are not selling. The fund manger doesn't get the cost because it's one of the fund expenses so it's just a case of deciding who pays and its pretty clear that those selling should pay the cost of selling. When there are more buyers than sellers the effective cost is low because the sellers can just reduce the amount of property buying to be done so there's no great additional cost. That changes dramatically when real properties have to be sold.

Your choice to hold commercial property was a good one, within the context of a good broad mix of investments.

This has all happened before a couple of decades ago when there were residential property funds established to buy property in London and exploit rapid price gains. Then the residential property market dropped and funds were often forced to delay redemptions so they could get a decent selling price.