Another “run on the fund.” More investors can’t get their money out but contemplate big losses.
By Nick Corbishley, for WOLF STREET:
In what is beginning to look like a trend, another British open-ended fund slammed its doors on investors today. After a surge of redemptions, M&G Investments, the fund management arm of UK insurance giant Prudential, decided to halt dealings in its direct property fund, which has more than £2.5 billion ($3.2 billion) in assets under management, as well as its feeder fund.
In July, M&G had already suspended redemptions at one of its property funds, with assets of just over £650 million, which intensified the pace of redepemptions from its other property funds. Today, the company extended the suspension to cover all of its funds.
The company said that M&G Property Portfolio was suspended after “unusually high and sustained outflows” triggered by “Brexit-related political uncertainty and ongoing structural shifts in the UK retail sector.” According toMorningstar, investors have yanked an estimated £900 million from the fund in the first ten months of this year. The portfolio had only one month of positive flows since Britain voted to leave the EU in June 2016.
“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 fund said in a statement.
M&G Property Portfolio invests in commercial properties across the UK including offices, industrial property and retail parks, a sector beleaguered by retailer failures and crushed values. According to the FT, around 37% of its portfolio is held in retail warehouses, shopping centers, designer outlets and standard retail, and another 2.5% in supermarkets.
Following the announcement of the suspension of the fund, shares in M&G dropped 2.6%, while the value of the property portfolio fund tumbled to its lowest level in six years. The fund is the worst performer in the IA UK Direct Property Sector in the past three years. Year-to-date, the fund is down 7%, according to Morningstar.
It also has one of the lowest cash levels in the industry: just 5% of total holdings, according to the FT, or 10%, according to Morningstar, likely depending on the timing when the measure was taken. Both agree that these cash levels are among the lowest in the industry. This makes the fund acutely vulnerable to a classic “run on the fund.”
As an open-ended property fund, M&G had no choice but to sell assets in the portfolio to raise enough money when investors took their money out. This is not a problem when the assets in question are highly liquid, such as large-cap stocks. But when the assets are high-yield bonds, loans, large positions of thinly traded small-cap stocks, or commercial real estate that can take days, weeks or even months to sell, there is a mismatch in liquidity between what the fund offers to its investors (daily liquidity) and what the fund holds (largely illiquid assets), and this is a big risk with these types of open-end mutual funds.
“The suspension will 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 said. The suspension will be monitored daily and reviewed every 28 days. M&G said the fund will re-open “as soon as liquidity levels have been sufficiently rebuilt”.
It all sounds drearily reminiscent of what Neil Woodford told the beleaguered investors of his £3.7 billion flagship Woodford Equity Income fund (WEI) in June, just after he slammed the doors shut on them. They were told that by December, the doors would be opened again after he had sold a large chunk of the fund’s assets at, or as near to market prices, as possible. Instead, it was decided that the fund would be wound up and all assets would be liquidated. According to preliminary estimates, investors could lose over one-third of their remaining principal, on top of the losses they’d incurred when the fund was still active. Many of those investors are retail investors or pensioners on modest incomes.
In the case of M&G Property Portfolio, its investors range from retail investors to institutional investors. The fund has said it will waive 30% of its annual charge to investors while they are unable to access their money, which is slightly better than the treatment Neil Woodford meted out to his investors. From the day WEI was gated, to the day the decision was finally taken to wind up the toxic fund, the now-disgraced former hedge fund legend collected full management fees (£65,000 a day) despite widespread public and political criticism.
But arguably the biggest legacy of Woodford’s demise is the loss of confidence of investors in funds that invest in assets that take a long time to sell, but from which those same investors can withdraw their money at any time.
The reverberations are already being felt across the industry, as investors begin wondering just how safe it is to entrust their savings with fund managers that may have similar liquidity mismatches to Woodford’s and M&G’s, and these investors are further incentivized to rush for the exits of their open-end mutual fund, to benefit from the first-mover advantage before the fund gets too damaged and is gated, leaving them twisting in the wind. And this by itself could precipitate even more runs on the fund. By Nick Corbishley, for WOLF STREET.