Business Maverick


Taking liberties during storm warnings

Taking liberties during storm warnings
A check on his investments led to a shock for a Liberty Unlisted Property Portfolio. (Photo: Waldo Swiegers/Bloomberg via Getty Images)

At the end of March 2020, Liberty Properties revalued its R20-billion property portfolio downwards by 20%, writing off R4-billion with a stroke of the pen. In the process, it forgot to tell its clients whose portfolio values fell by the same amount.

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. 

To be fair, this information was shared with Liberty’s advisers almost immediately, but the message in many cases did not reach its mark as many people were adjusting to the work-from-home regime. 

A curiosity is that the listed entity, Liberty Two Degrees (L2D), was not revalued. The two funds hold investments in essentially the same property portfolio (perhaps with different configurations) and share common directors – Liberty CEO David Munro is a director of L2D, while Amelia Beattie is CEO of L2D, which is the portfolio manager of the LPP and Excelsior Funds.

L2D alerted its investors via Sens on 30 March 2020 that it had engaged with its valuers for views in assessing the potential impact of the Covid-19 pandemic on valuation metrics and forecast assumptions. But unlike the unlisted fund, the managers of L2D did not revalue the portfolio downwards. They did, however, withdraw distribution guidance for the financial year to December 2020.

A more recent L2D trading statement, dated 9 July 2020, did warn investors that the portfolio would be revalued downwards by between 10% and 20%.  

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. 

One could also argue, as Liberty does, that the market had already marked L2D’s assets down by 23% for the year to date (via the share price), making the annual revaluation simply a formality.

But there is another twist to the story. The adjustment to the client’s fund was not calculated from the end value, but was based on an average holding over a three-month period. 

So while the fund value was R1.4-million at the end of March 2020, it was actually R1.8-million at the start of the 2020 – which means his average value over the period was greater than R1.4-million. This means that the 20% revaluation was applied to a bigger number and thus his fund value, after revaluation, reduced by almost 25%. 

The client was enraged. “Why am I being penalised? I sold my funds down because I saw the storm warnings. This is tantamount to theft and I am angry at the highhanded approach Liberty Life has adopted in managing my funds,” he said. 

Liberty, for its part, was adamant it was treating its customers fairly. “Given that people are investing in and disinvesting from the LPP every day, it is important that the value and returns are updated to reflect the current market value.

“Not making any adjustments would mean those who exit the portfolio would do so at the historic value, whilst those who remain invested would carry the full burden of reduced valuations should they come into the formal valuation of the portfolio,” the company said. 

“Unfortunately, we are not in a position to reverse the decision we have made in respect of the valuation of the Liberty Property Portfolio. The bulk of the portfolio is invested in retail malls which have been severely impacted by the lockdown and economic downturn, with the outlook for assets like these being highly uncertain,” Munro said in correspondence with the client on 8 May 2020. 

“We acknowledge that the manner in which we communicated and implemented this valuation adjustment may have led to some confusion, and we truly apologise for this. Unfortunately, the economic impact of this crisis and the consequent impact on asset valuations everywhere is beyond our control.” 

However, at the end of June 2020, Liberty made a small concession by capping the revaluation at a maximum of 20%.

“We do understand now and acknowledge that the mechanism for the application of the adjustment on LPP was not well understood,” wrote Nagar in the letter to clients. “In the interest of transparency and solidarity, we have therefore decided to limit the adjustment to -20% of the value of your investment at the end of March [2020]. This means that if you made any withdrawals from LPP during the first quarter and as a result, you experienced an adjustment of more than -20%, we will put you in a position where the adjustment is no more than -20% of your end March balance.”

In this case, it meant the client was refunded R55,000.

This goes to show that while companies may be technically correct in their actions, how they are applied makes a difference. 

Liberty’s poor communication in this regard eroded precious trust between the client and the institution. In fact, the client remains convinced that Liberty acted unethically. 

As is so often the case with large corporates, it took an unnecessary amount of effort to unpack what happened.

Liberty, for its part, has tried to make good by limiting the deduction to 20%, recognising its own role in the mess. DM/BM


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