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As M&G freezes £2.5B property fund, experts criticize open-ended structure


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As M&G freezes £2.5B property fund, experts criticize open-ended structure

M&G Real Estate acted responsibly by freezing its £2.54 billion property fund after a surge in investors trying to withdraw their money, experts said, while warning that the suspension could have wider repercussions.

The debacle has echoes of property fund suspensions in 2016 following the Brexit referendum and has reignited a debate about open-ended funds' suitability to real estate, which is an illiquid asset class where deals can take months, or even years, to conclude.

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Several property funds were suspended after the 2016 Brexit referendum, which was called by then-Prime Minister David Cameron.

Source: AP Photo

The U.K.-based fund manager temporarily stopped investors from withdrawing money from its Property Portfolio fund after being unable to sell off assets fast enough to release money to match the volume of withdrawals being requested, according to a Dec. 4 statement.

Market uncertainty around Brexit has made it hard to conclude deals, the company said in a note to investors.

"Despite U.K. and foreign investors buying a considerable amount of commercial property this year, investment decisions have been increasingly postponed as we approach Brexit, making it harder to sell property at what we consider to be fair prices."

The immediate priority for the fund is an "orderly sale of property" in order to raise cash levels to pay off investors who want to leave the fund, the letter said. M&G is unable to say when the suspension will end.

The fund is open to members of the public. Funds will still be actively managed during the suspension, but investors' annual charges will be reduced by 30%.

The same fund was also suspended in 2016, four months after the U.K.'s Brexit referendum. A number of its peers including Aberdeen Asset Management Plc, Aviva PLC and Janus Henderson Group PLC, then Henderson Group PLC, also took a decision to freeze their funds around the same time.

Fund outflows

For Ben Yearsley, director at Shore Financial Planning, the latest M&G fund suspension underscores how unsuitable the open-ended fund structure is for property. With these funds, investors can move their money out with relatively few restrictions.

"In my view this is another example of why illiquid assets should not be held in open-ended funds. There is an inherent mismatch," he said in an interview.

It was only a matter of time before there was a repeat of the 2016 suspensions, and there could be further casualties.

"A property fund was going to suspend at some point as most funds have had outflows in 2019. [The suspension in] 2016 was caused, as far as I'm aware, by one large wealth manager pulling all their property investments out in one go. This feels more like a gradual drip-drip of money out rather than big holders selling. The problem with one fund suspending is that it causes a panic among investors in other funds who then pull their money out, causing a ripple effect," he said.

Real estate fund managers are trying to hold more cash in order to maintain a buffer against sudden spikes in redemptions, but there "only so much to go round," Yearsley said, adding that he would not be surprised if other U.K. property funds also end up suspending trading.

U.K. property funds and recognized overseas funds have recorded outflows of more than £1 billion this year, according to data from the Investment Association, a trade body.

'Blunt instrument'

John Forbes, an independent consultant and former partner at PricewaterhouseCoopers, said that while M&G had done the right thing by suspending trading rather than pushing for fire sales of assets, the incident has raised questions about how open-ended property funds are regulated and administered.

"My major concern is that the current rules force managers into the blunt instrument of full suspension," he said in an interview.

Ever since the 2016 referendum, Forbes has been lobbying the Financial Conduct Authority to bring in changes to regulations of open-ended funds that would allow for what he describes as "a more flexible deferral of redemptions."

"This would allow funds to continue to provide daily pricing and to allow cash to come in to match with investors wanting to leave," Forbes said.

The FCA said in September this year that it will monitor open-ended funds holding illiquid assets such as property more tightly, but will not ban them. New requirements on managers of certain open-ended funds include providing investors with "clear and prominent information on liquidity risks" and conditions in which access to their money could be restricted.

Open-ended funds came under scrutiny earlier this year when Woodford Investment Management Ltd. suspended and then shut down its £3.7 billion flagship equity fund after it was hit with a redemption request from a large institutional client that it was unable to meet.