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07 July, 2016

Standard Life UK Real Estate Fund suspended

Following the momentous vote for the UK to leave the EU on the 23rd of June 2016 there have been many serious market repercussions. Here at Walden Capital our global perspective has allowed all of our portfolios to remain in positive territory since the 23rd June.

However despite this bias, neither we nor our clients are untouched by the global turmoil unleashed by the surprise outcome of the Referendum. In particular we are sorry to announce that the Standard Life UK Commercial Property fund has taken the prudent but regrettable decision to suspend redemptions.

This means that investors who have holdings in this fund cannot redeem these holdings until the fund is released from suspension. Standard Life have said they will review the position no less often than every 28 days.

We do appreciate this news is not welcome – and we thought it may be some comfort, and useful, for us to explain why this has happened, and what the implications are for you, immediately and for the long term.

Property, especially real property, is difficult and expensive to buy and sell. However it provides attractive income for a portfolio, and doesn't behave in the same way as shares, or bonds, so is a good diversifier for investors to reduce overall risk of a portfolio. A property fund is one way to get access to the performance and value of property – without needing either to fund, or manage a real building.

When markets are doing well, and the pressure for redeeming money is not high on property funds they will absorb the costs of purchasing new properties, and these are shared across all holders, within the net asset price. When redemptions begin to increase in frequency the fund manager has a number of strategies available to them to protect ongoing investors.

The first of these is to move to 'bid pricing' where the fund price is reduced to reflect the acquisition cost of the property in the fund. Standard Life applied this change before the referendum as a reaction to increasing redemptions – and to protect against short term investors transferring costs to long term investors. This had a 5% impact on the price of units in the fund.

Once the outcome of the referendum was clear there an expectation that the price of commercial property would reduce began to emerge – and once again to protect long term investors, Standard Life immediately took the decision to apply a 'fair value reduction' to the fund – which had the result of reducing the price of units by almost another 5%.

Finally on the 4th July they took the decision to suspend trading in the fund until conditions improve.

This is obviously not welcome news, although it is very much in line with what other fund managers have done, and we do believe is being implemented to protect you, the longer term investor. We should also compare to what happened with property trusts, and property investment companies (known as REITS), where there was an immediate drop in price of many of them in many cases this was well over 20%.

We would also remind you that this fund is 10% of 6 of our portfolios – and as such the total reduction in value has impacted portfolios by approximately 1% overall thus far. There may be further market value reductions depending on future sentiment about property – and we will keep you informed if these are material.

If you wish to discuss this further please do get in touch, but please be reassured, we do not believe in knee jerk reactions, or emotionally led investing. We are well placed to help you in continuing to protect, and grow your wealth over the long term using our evidence based methodology.

by John Stirling

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