As a result of the RLP Property fund suspension we need to carefully manage property exposure across Governed Range in order to minimise additional exposure or trading in the underlying fund.
The impact of Covid-19 has resulted in increased uncertainty related to the valuation of property fund assets. Property surveyors who provide valuations of the properties held within property funds are currently including a material uncertainty clause within their valuations. This has caused the majority of Property funds across the industry, including the RLP Property fund, to suspend dealing. As a result, all trading in or out of the fund is suspended unless it relates to contractual obligations such as retirement, death or taking income.
Exposure to the RLP Property fund through Governed Range ranges from 5% to 17.5% based on attitude to risk and term to retirement. This allocation is controlled by Royal London through our tactical asset allocation (TAA) process and follows a robust governance framework based on the long-term strategic asset allocation. During the period that the material uncertainty clause applies we will use this process to ensure that customers invested in Governed Range do not get any increase in exposure to property assets.
We took the decision to switch off automatic rebalancing within the Governed Portfolios and GRIPs following the tactical change implemented in March and we’ll manage the rebalancing requirement using the TAA process. As a result, we have more control of the underlying experience within each GP and GRIP and expect the allocations in portfolios to drift as a result of market moves between tactical changes. For example, when risk assets, such as equities and corporate bonds, are falling we expect the property weight in portfolios to drift higher as property relatively outperforms (and vice versa). We monitor this drift daily and have a weekly governance forum where each portfolio is reviewed and discussed.
Each time we make a TAA change within the governed range customers are rebalanced to the new TAA for each portfolio. We have allowed for the drift in portfolios in all TAA changes since the start of April where these adjustments were included for the first time.
By way of example we can have a look at the TAA change made on 6 April which allowed for property drift for the first time. In the period since the March TAA change property outperformed risk assets and as a result the property allocation had drifted a little higher. The drifts across governed range portfolios varied from 3bps to 43bps depending on the relative performance of property in any portfolio. Generally lower risk portfolios drifted less than higher risk portfolios.
This drift resulted in a higher allocation to the RLP Property fund. It allowed us to maintain customers’ existing unit holdings in the RLP Property fund and avoid trading in the RLP Property fund. This approach is the same as customers experienced in our managed funds and other multi asset strategies across the industry.
The below table highlights how this worked in practice for GP5. Property was one of the better performing asset classes in the period between the March tactical change and the changes made on 6 April. As a result, the property weighting drifted up to 15.3% prior to implementing a new TAA position. The new TAA position took account of this and changed tactical exposures to other asset classes while maintaining a 15.3% allocation to property. As a result, rebalancing to the new TAA position resulted in no change to property exposure.
Source: Royal London, Responsible Investing Research Summary, 2019
Any new money coming into the governed range will be allocated in accordance with the TAA that applies at the time that the money is paid in. During this time the money allocated to the RLP Property fund will be held as cash within the fund rather than the underlying property vehicle (Royal London Pooled Property Fund).
So, while a customer investing new money will gain new units in RLP Property this will effectively be invested in cash within the fund initially. As part of future tactical asset allocation decisions RLAM and the multi asset team can decide to allocate this cash to other asset classes (excluding property) based on their market views at the time.
The underlying property vehicle in RLP Property is the Royal London Pooled Property fund and this continues to be actively managed at this time. The Property team at RLAM continue to progress buying and selling buildings seeking to add value for our customers. We are currently progressing with several sales which are being made above market value. We do recognise that the current market is challenging and have introduced additional governance and oversight during this period.