British investors have been locked into another fund after M&G Investments suspended trading in its £2.5billion commercial property fund today.
The move comes after a rush of investors pulled out as the Property Portfolio fund’s holdings were hit by Brexit uncertainty and the retail slump that has plagued the High Street. However, property funds are notoriously illiquid and M&G were not able to sell off assets to meet the demand from investors for their cash.
The announcement comes at the end of a year in which the world of investing as one of its stars Neil Woodford suffered a spectacular fall from grace after he was forced to gate his huge equity income fund in a similar fashion.
This year has seen £1.6billion of outflows across the UK property sector
M&G blamed sustained Brexit-related political uncertainty and the retailer bloodbath on the high street for investor anxiety, leaving its fund £750million down over the first eight months of 2019, according to industry tracker Morningstar.
With dampening demand from retailers for commercial premises, the M&G fund’s managers have struggled to sell assets fast enough to meet investor outflows.
Investors who have money still in the fund will now be unable to sell out until it reopens and the FTSE 100 firm has given no indication of when that is likely to be.
A spokesman for M&G said the fund will still be actively managed during the suspension but investors will see their annual charges discounted by 30 per cent.
He said: ‘Suspension will be regularly reviewed, we will keep investors informed via the M&G website and notify of any changes to the level of fee waiver.’
He claimed the suspension would give the fund’s managers time to achieve better prices for the property assets it was looking to sell to raise the cash to pay out investors who want to sell.
‘In all other aspects, the fund will continue to operate as normal throughout the suspension and customers will continue to receive income payments,’ he added.
Orders placed after midday on 4 December 2019 are being declined until the suspension is lifted.
Why has this happened?
The M&G Property Portfolio has seen its fund size fall from £4billion to £2.5billion since 2016 – which was the last time it suspended trading, along with several other high-profile property funds following the EU referendum result.
The 2016 suspension epidemic was triggered by uncertainty following the UK’s decision to leave the UK, uncertainty that has continued ever since.
Alongside a drop in investor confidence in the retail sector, this has lead to an increasingly negative outlook for commercial property.
Ryan Hughes of investment platform AJ Bell said: ‘The UK property sector has been out of favour with investors, seeing outflows every month for the past year, with investors withdrawing £1.6billion of money during that time.
‘However, it’s important to put this in context, as the three months around the referendum saw £2.3billion of outflows alone.
‘Property is an inherently illiquid asset, potentially taking months to sell, and so when faced with large outflows the fund manager has to juggle selling off assets and maintaining cash levels.
‘The M&G Property Portfolio only had 5 per cent in cash at the end of October, presumably after seeing sizeable outflows. This suspension will give the managers time to sell off assets in order to meet those redemptions.’
The M&G Property Portfolio has seen its fund size fall from £4billion to £2.5billion since 2016
It is important to note the difference between the reasons behind this fund suspension and that of the Woodford Equity Income fund earlier this year, which is now in the process of winding up.
However unlike Woodford’s fund, M&G’s Property Portfolio has not had problematic performance (it is up 3.4 per cent over the past three years), but it is invested in an inherently illiquid asset class and therefore redemptions need to be dealt with through an orderly sale process.
Will we see a repeat of the 2016 property fund suspensions?
Today’s suspension might not come as a surprise what with sustained political instability and an upcoming General Election.
The question now is whether or not we will see other property funds follow suit as was the case in 2016.
Darius McDermott of Chelsea Financial Services said one suspension could result in a domino effect
Darius McDermott of Chelsea Financial Services said: ‘A number of property funds have been in redemption for a while due to Brexit uncertainty and general issues around the retail sector.
‘It seems M&G’s flows got too much for the cash allocation to now cover them and we could see others follow suit. As we have seen in the past, one suspension can result in a domino effect, as investors worry about not being able to access their money.
‘This may be smaller scale and limited to one or two funds, or it could be most of the sector – at this point, we don’t know.’
Jason Hollands of Tilney agreed that one fund’s action can risk inadvertently triggering increased selling across the asset class from investors worried about being lock into other funds.
However, he said some worries around the sector may be alleviated next week when the General Election results are known.
‘If you are a long term investor, there is no reason to panic sell out of UK property funds,’ he added.
Now that the fund is suspended, there is nothing investors can do. However, unless they also decide to suspend trading, other property funds will have to give investors their money back if they decide to redeem it.
The General Election may result in some stability but Ben Yearsley of Shore Financial Planning warns a Labour victory could mean even more investors trying to pull their money out of commercial property.
The City watchdog released its final rules on property funds last month, making it easier for funds to justify suspending trading.
AJ Bell’s Hughes argued the rule change should have gone further to protect investors, banning open-ended funds from holding such illiquid assets.
He said: ‘Bearing in mind the fundamental mismatch between the underlying assets and liquidity offered to investors, that looks to be a mistake, particularly given the fact that this type of fund has now suspended twice in less than four years.’
McDermott added: ‘In terms of the Financial Conduct Authority and heightened awareness of illiquid products, this could increase scrutiny further and the FCA may rethink the conclusions from their recent consultation.’
|Fund||Fund size Dec 2018 (£billion)||Fund Size Dec 2019 (£billion)||Annual management charge (%)||Ongoing charges figure (%)||Yield (%)|
|Aberdeen UK Property||0.5||1.3||0.75||0.89||2.8|
|Aviva Investors UK Property||1||0.5||–||0.74||8.27|
|BMO UK Property||0.3||0.5||0.75||0.83||2.8|
|Janus Henderson UK Property PAIF||3.1||2.1||0.75||0.84||2.8|
|Kames Property Income||0.4||0.6||0.75||0.82||5.12|
|L&G UK Property||2.4||3.2||–||0.75||2.9|
|M&G Property Portfolio||4||2.5||0.79||0.79||3.8|
|Royal London Property||0.4||0.4||0.75||0.8||–|
|Standard Life Investments UK Real Estate||2.6||1.8||0.75||0.9||3.29|
|Threadneedle UK Property||1.1||1.1||0.75||0.8||4.4|
|Source: Latest available data via FE Analytics|
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