Taking liberties during storm warnings

It was an ordinary Monday morning at the start of the three-week lockdown period during March 2020. Householders, not used to being housebound, were going about their domestic chores. The weather, back then, was still balmy. One individual, an investor in the Liberty Unlisted Property Portfolio (LPP), was checking his investments, as he does “far too regularly”, he tells Business Maverick.

Imagine his surprise when after watching the value of his units inch upwards for several weeks, his portfolio was reduced in value by almost 25%, falling by R335,000 with over 200,000 units removed from his portfolio.

This is shocking under any circumstances, but given the stable performance of the fund, and the fact that as of 29 February 2020, the fund fact sheet reflected a marginally positive return for the year to date, it was particularly unpalatable. 

The fund is a retail-focused property portfolio with smaller allocations to both the office and hospitality sectors.

There was no correspondence from Liberty to explain this. His Liberty financial adviser could not explain it either. In fact, it subsequently transpired that the adviser had received some communication from Liberty, but the nature of the transaction was so unprecedented and the communication so vague, that the adviser wondered aloud whether Liberty’s actions were “fair or even legal”. 

And so began a frustrating month of trying to uncover what had transpired – the client estimates he placed 110 telephone calls and sent over 65 emails to the insurance giant, including to Liberty Holdings CEO David Munro.

“I’ve been with Liberty for over 30 years and I have never seen a write-down of this magnitude, ever. And for the next few weeks, no one could explain why,” he says. 

Of course, what is happening in one fund cannot be divorced from financial markets in general. On 19 February 2020, the US stock market hit an all-time high, as measured by the benchmark S&P 500 Index. But the storm clouds of the Covid-19 crisis were gathering and within only 15 trading days, the index had fallen by about 25%. 

Every stock market in the world was affected and by the end of March 2020, the JSE was down almost 25% from the beginning of 2020. 

Specifically, the listed property sector plunged, with retail property-focused portfolios hardest hit. Currently, the JSE All Property Index is down by almost 50% since the start of 2020.

As is customary, the LPP portfolio was valued at 31 December 2019 by independent valuers as part of the year-end reporting process. In this case, despite the fact that the economy was already in recession and economic clouds were gathering, the outlook was deemed favourable and a slight upward valuation was made to the fund. 

However, by March 2020, Liberty’s management team was alarmed. 

“Liberty engaged with its valuers for views in assessing the potential impact of the Covid-19 pandemic on valuation metrics and forecast assumptions,” wrote Sunil Nagar, the managing executive for Operations in an explanatory letter to clients dated 29 June 2020.

“We emphasise that formal valuations have not been called for, but management has performed an analysis of the current position and potential stresses on the individual assets. What we can say is that, in light of the various scenarios, as of 30 March 2020 we have downwardly adjusted the capital value of the investments held in LPP through a reduction in the number of units held. 

“The net effect of this adjustment is a 20% reduction in the value of your investment in LPP. The interim bonus rate will also be reduced from 6.25% to 5.5% going forward, applicable to the reduced number of units.”

While the underlying assets are the same, the rules that govern the management of listed and unlisted assets, and the communication around these, are different.