M&G Investments has suspended dealing in its £2.5 billion UK property fund after suffering nearly £1 billion of withdrawals over the last 12 months as Brexit uncertainty took its toll.
Trading in the M&G Property Portfolio and its feeder fund has been suspended with immediate effect.
'In recent months, continued Brexit-related uncertainty and ongoing structural shifts in the UK retail sector have prompted unusually high outflows from our property fund,' the fund group said in a letter to investors.
'Given that these circumstances and deteriorating market conditions have significantly impacted our ability to sell commercial property, we have temporarily suspended dealing in the interests of protecting our customers.'
Investors have pulled £992 million from the fund over the last 12 months, according to Morningstar data, while the fund has lost 7.9% this year, placing it at the bottom of the Investment Association's UK Direct Property sector.
M&G will waive 30% of its 0.81% ongoing charge during the suspension, which will be reviewed each month.
'We are unable to say how long the funds will be suspended for, but we will formally review the suspension on a monthly basis and will keep you updated via the M&G website,' the fund group said.
It added that 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'.
'In all other aspects, the fund will continue to operate as normal throughout the suspension and customers will continue to receive income payments.'
Managers Fiona Rowley and Justin Upton said that this year they had sold 14 properties for a total of £374.8 million up to the end of October, and would be focused on 'orderly sale of properties to restore the funds' cash levels' during the suspension.
Cash levels stood at 5% of the fund at the end of October, with the fund holding 91 UK commercial properties in retail, industrial and office sectors.
UK property funds have come under renewed pressure over the last year as Brexit uncertainty has weighed on the sector, with investors pulling £1.6 billion over that period.
Withdrawals have not however reached the levels seen following the Brexit referendum, when investors redeemed £2.3 billion in the space of three months, sparking a wave of suspensions. That followed a similar spate of fund suspensions during the financial crisis.
M&G's suspension of its property fund will reignite debate over the suitability of hard-to-trade assets like property in open-ended funds, which need to sell assets to fund investor withdrawals.
Bank of England governor Mark Carney said earlier this year that funds holding illiquid assets but offering daily liquidity were 'built on a lie', in the aftermath of the suspension of the Woodford Equity Income fund, which featured heavy positions in unquoted companies and hard-to-trade smaller stocks.
The Financial Conduct Authority in September announced new rules that will come into force next year requiring property funds to suspend dealing if there is 'material uncertainty' over the value of 20% of their assets.
AJ Bell head of active portfolios Ryan Hughes said the regulator's decision not to ban the holding of illiquid assets in daily-dealing open-ended funds now looked to be a 'mistake'.
'Bearing in mind the fundamental mismatch between the underlying assets and the 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,' he said.
Bob Steers, chief executive of real estate investment trust specialist Cohen & Steers, said the suspension showed how cash reserves held by property funds could 'quickly evaporate'.
'Lock-ups of daily-dealing open-ended funds investing directly in real estate - occurring in 2008, in 2016, and now again in 2019 - have exposed the inherent design flaw of relying on cash buffers to provide liquidity in times of market stress,' he said.
original source: Citywire
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