French decree ‘reduces investor protection’
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New rules aimed at creating property funds for small investors in France replicate defects of German funds that suffered panic withdrawals over the turn of the year, according to an assessment by an advisor to the French financial market regulator.
Noël Amenc, director of the Edhec Risk and Asset Management Research Centre in Nice, argues that a decree issued in October to provide a framework for open-ended property funds could lead to overconfidence among investors. He urges changes to correct the decree’s faults.
The terminology used in the decree and the way the products are likely to be marketed to savers are “potentially dangerous sources of confusion,” he says.
Open ended funds do not have a fixed number of shares, but create new shares to meet investor demand and redeem shares when investors want to sell.
Mr Amenc, who is a member of the scientific council of the Financial Markets Authority (AMF), says he has warned the regulator of the difficulties. He says the proposed funds provide illusory liquidity. “The problem with an open-ended fund is that it gives investors liquidity, even though the underlying assets are not liquid.”
The proposed funds, to be known as OPCIs, are similar to those newly permitted in Germany two years ago. A run by small investors in December and January – following warnings of possible overvaluations of some office properties – led some funds to be frozen.
The French decree strengthens the rules for valuing property over the previous regime, insisting that independent experts check valuations.
Mr Amenc argues that the net asset values of property funds cannot be compared with the the NAVs of funds which hold financial assets that can be readily valued.
In fact, NAVs will be totally dependent on infrequent expert valuations – with no risk premium built in to reflect the normal risks of property investments.
The decree also gives OPCIs the possibility of borrowing money up to 50 per cent of the value of their unlisted real estate assets. This provision appears aimed to help manage the funds and help liquidity.
In fact, Mr Amenc says, the OPCI could well be forced to borrow money to pay back share redemption requests – exactly the wrong time to increase leverage. This will lead, he argues, to “reverse portfolio insurance”.
“Instead of ‘guaranteeing’ a minimum level of capital, the fund will increase its exposure to falling markets,” he says.
The assessment also argues that the custodian role established by the decree will have such restricted responsibilities that the term custodian is hardly accurate.
Part of the problem is that the decree appears to seek to cling to the terminology, legal framework and practices surrounding of mutual funds, he says.
This only adds to the confusion. “Open-ended property funds are not mutual property funds,” Mr Amenc argues.
“We consider that the …decree reduces investor protection as far as collective property investment products are concerned,” the assessment concludes.
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