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The M&G Property fund has suspended redemptions...again. The last time was only back in 2016 in the immediate aftermath of the Brexit vote.
Once more investors are left in a 'daily-dealing' fund and unable to buy or sell. It means anyone that needs to sell, to raise cash cannot do so. It also means a portfolio can not be rebalanced or run as effectively.
As the memory of the Woodford fund is still fresh in everyone's mind, people will be wondering which fund is next.
This fear of which fund will suspend next, may become a self-fulfilling prophecy for investors.
When I wrote recently about the Neil Woodford fund (which can be found here), I referred to property funds more commonly suspending.
As stated in the article, it should be that wealth managers add value to clients by avoiding these situations, but these types of property funds are very often used in wealth management client portfolios. Most of the time, they produce a bit of capital growth and 3-4% income yield, without much volatility, making them appear attractive.
The problems typically appear when you have underwhelming performance, causing people to withdraw their money faster than the fund manager can sell assets to meet these redemptions.
As M&G Property is invested directly into property, the assets they must sell are not quick to sell – unless you take a big hit on pricing.
Performance and Outflows
The performance of M&G Property over the last 12 months has seen the fund drop 7.3%*
We can see how people have been steadily withdrawing money from the fund as over the past 12 months, assets under management have gone from roughly £3.7bn to £2.5bn**
The irony here is that UK property companies (often referred to as REITS, and tradable through the day on the London Stock Exchange) have been one of the best performing sectors this year.
The iShares UK Property ETF that we hold within client portfolios is up over 22% year to date. We feel it is a holding that could potentially act as the most effective hedge for any form of softer than expected Brexit.
One of the difficulties facing wealth managers is that a lot of portfolios are now managed on what we call a model basis. All clients in a certain model (e.g. a medium risk £ denominated model) must trade at the same time. Failure to do so, could be considered a breach of the ‘treating clients fairly’ regulations.
This means the big wealth managers still invested in property funds would have to withdraw a large amount of money from a property all at once.
It makes the risk of another fund (or funds) suspending much more likely.
Other property funds at risk of needing to suspend are those run by Aberdeen, Threadneedle, Aviva and BMO - based on trailing 12-month performance, cash weightings and outflows.
The other option, rather than suspended, is to adjust the pricing on these funds (known as swing pricing) - which means anyone selling must do so at a bigger than usual discount.
There is a real risk now, that investors read this news and herd together for the door on other funds.
This could make other suspensions or swing pricing changes, self-fulfilling.
We would suggest investors review their portfolios for direct property funds, and other less obvious fund candidates for suspension. This can include equity, bond and alternative funds. There is usually a better alternative to be found.
If you have an investment portfolio that may be at risk, and you would like us to look at and review - drop us an email. We do not charge for this service.
The value of investments can go down as well as up. You may not get back the amount you originally invested.
ETF – exchange traded fund. Listed on a stock exchange and trades throughout the business day.
REIT – real estate investment trust. Usually a company that owns, and in most cases operates, income producing real estate. They are listed on a stock exchange and trade throughout the business day.
'Alternative fund' – general term often used by wealth managers to describe hedge funds and other types of diversifying funds (i.e. those that do not simply invest into bond or equities).
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