What's going on?

Three UK investment funds that invest in real estate told their clients on Tuesday that, for the time being, they cannot withdraw their money. It�s a significant negative for the investment management sector and an instructive lesson for investors in any geography.

What does this mean?

There are lots of investment funds that invest in things other than stocks and bonds – and real estate funds are one such example. Typically, these funds keep some of their money in cash so that if some investors ask for their money back, they have the cash to satisfy their request. But the bulk of their investments are in things that can�t be sold immediately (like property). So, if too many investors ask for their money back at the same time, then the fund doesn�t have the cash to repay everyone – and the fund might suspend people�s ability to withdraw money until it�s able to raise cash by selling more of its investments.

Why should I care?

For you personally: Lots of investment funds can suspend the ability to withdraw money. The problem arises when there is a fundamental mismatch between investors� supposed ability to withdraw their money and the nature of the investments that the fund buys. When the investments are not easy to sell, like property, there can be a problem. Investment funds that own stocks (and bonds such as government bonds) typically do not suffer from this problem as, even in difficult times, they tend to trade routinely on an open market. It�s worth being aware of this potential dynamic when investing in funds.

For the stocks: UK fund managers are getting hurt big time post-Brexit. Investment managers like Standard Life and Legal & General �(and others) are having a tough time – and this news hasn�t helped. A slower economy is expected to generate lower investor returns (a sentiment which typically makes people less likely to invest) and, if people aren�t making as much money, they will probably not have as much leftover to invest. Tuesday�s news is a potential threat to the credibility of the investment management industry – and another negative.