Investors in a £2.5bn UK property fund have been blocked from withdrawing cash after “unusually high and sustained outflows.”
M&G Investments (MNG.L) said on Wednesday afternoon it was halting withdrawals from its UK-focused Property Portfolio Fund with immediate affect.
The company said that “unusually high and sustained outflows” combined with “continued Brexit-related political uncertainty and ongoing structural shifts in the UK retail sector” have made it “difficult” to sell buildings it is invested fast enough to meet redemptions.
“Given these circumstances, we have now reached a point where M&G believes it will best protect the interests of the Funds’ customers by applying a temporary suspension in dealing,” the company said.
Shares in M&G fell as much as 3% on the news.
The Property Portfolio fund manages £2.54bn of investor cash. It is invested in 91 properties across the UK, including supermarkets and warehouses in and around major UK cities.
Investors include wealth managers and asset managers. Retail investors are also invested through platforms like Hargreaves Landsdown (HL.L). The split between retail and institutional money is not clear.
Almost £950m has been withdrawn from the main Property Portfolio fund since the start of the year, according to data provider Morningstar. Investors pulled £171m in the month of July alone.
Fund performance has been poor. Trailing 12-month returns for the Property Portfolio fund were -7.75% at the end of November, according to Morningstar. The FTSE 100 rose over 5.5% across the same period.
M&G said the suspension would “allow the fund managers time to raise cash levels to pay redemptions, whilst ensuring that asset sales are achieved at market prices and investors in the Fund are safeguarded.”
M&G will waive 30% of its annual fee during the duration of the suspension and will review the freeze every 28 days.
Echoes of 2016 and Woodford crisis
The freeze recalls issues faced by property funds in 2016, when seven UK-focused funds ‘gated’ withdrawals in the wake of the Brexit referendum. The funds faced similar liquidity problems then as investors rushed to pull cash after the result. M&G’s fund was among those affected.
“Despite the sector-wide gating of UK commercial real estate funds in 2016, material progress has, evidently, not been made,” said Alastair Sewell, senior director of fund and asset management at Fitch Ratings.
M&G’s decision also marks the second high-profile liquidity crisis in the City of London this year. Money manager Neil Woodford was forced to suspend withdrawals from his flagship fund in June. The fiasco eventually led to the collapse of his entire investment business in October.
The Woodford crisis sparked criticism of open-ended funds, which let investors trade in and out daily but even if underlying assets can take weeks or months to sell. The risk is that a spike in withdrawals can leave funds with not enough cash on hand to meet withdrawals.
Jonathan Miller, Morningstar’s Director of UK Manager Research, said Wednesday: “Cash in the portfolio generally hovered between 6% and 10% this year, but reached 5% at the end of October. Many other comparable funds are much higher on this side. There hasn’t been enough of a buffer here, nor the ability to swiftly sell assets to meet redemptions.”
Ian Sayers, the chief executive of the Association of Investment Companies (AIC), wrote in a letter to MPs in June: “Long-term lessons must be learnt to limit the damage when open-ended funds invest in illiquid assets.”
Miller said: “While bricks and mortar property acts as a portfolio diversifier that also provides an income, we’ve continually flagged there’s a mismatch between its illiquid structure and a daily dealing fund.
“Even though M&G are waiving part of the management fee during the suspension period, we can’t be far away from the regulator stepping in regarding issues in this space.”
New rules around disclosure of liquidity risks are set to come into force in the UK from September 2020.