M&G Investments has stressed the decision to block withdrawals from its UK property fund is not reminiscent of Neil Woodford’s suspended equity income fund as it seeks to distance itself from the troubled manager.
On 3 June the asset manager wrote to clients of the M&G UK Property fund to inform them it had placed a temporary deferral on the fund, restricting customers from taking out their money for up to six months.
Restrictions were also placed on certain withdrawals from the Prudential UK Property fund, which feeds into the M&G fund, a move which Portfolio Adviser understands affected 65% of customers in the fund.
Both funds are only available for long-term institutional investors such as pension funds. The M&G UK Property fund has around £636m in assets under management, while the Pru mandate is much smaller at £50m and is invested across 8,000 workplace pension scheme members.
A spokesperson for M&G said: “Our customer base consists of large pension funds which invest with us for the very long term. Some schemes who have been invested with us in this fund since the 70’s are de-risking which is why it is now in temporary deferral.”
They added that temporary deferrals are not the same as a suspension but rather a common tool in institutional fund management to deal with redemption requests that exceed the level of readily available cash allowing the fund manager to rebuild liquidity in “a controlled manner”. “Equally importantly, it protects the interests of everyone invested.”
Whereas retail property funds typically hold larger amounts of cash institutional funds hold minimum cash to avoid performance drag, they said.
‘Very different set of circumstances’ to Woodford
Willis Owen head of personal investing Adrian Lowcock said that while shuttering funds temporarily will naturally draw comparisons to Woodford at this time the two scenarios are not compatible.
“Property funds should be attractive to different types of investors, those with long term aspirations and looking to achieve diversification,” he said.
Unlike the retail investors in Woodford Equity Income fund, the investors in the M&G UK Property fund are institutional and professional investors who should be more prepared for suspensions and will have anticipated the potential for such an event, he said.
Woodford’s fund suspension, which also occurred on 3 June, “came as a big surprise to the majority of his investors because they perceived it as a core equity income fund,” said Lowcock.
Tilney managing director Jason Hollands said the integration of Prudential’s UK business and M&G may be a marginal factor.
“I think this a very different set of circumstances from Woodford and this is likely to represent one or more a large institutional investors, or insurance funds, seeking to reduce their allocation to the asset class which will require an orderly process of disposals,” Hollands said.
Chelsea Financial Services managing director Darius McDermott agreed the temporary deferral on the M&G and Pru funds is not a liquidity issue but a result of a “quite normal” de-risking process.
McDermott noted only new contributions have been deferred for six months, not members who have already been taking their pensions out.
“Pru are basically stopping this fund being a ‘choice’ for members as it is now so small. They have written to members and, unless a member tells the Pru a different fund they want the money to go into, it is going into a cash fund at the moment,” he said.
“Pru have promised that, at the end of the six month deferral, the client will get the higher value of either the cash fund, the original amount invested or the property fund returns to go into something else. So they won’t lose out.”
Investors should know liquidity risks
Hollands said the raft of property funds that gated immediately after the EU referendum highlighted that physical property is an illiquid asset class.
“Those who are particularly concerned about Brexit have had three years now to decide whether to reduce their exposure to UK commercial property and so while ‘no deal’ concerns are certainly escalating again given the fast approaching Halloween deadline for leaving the EU, I think the risk of a widespread wave of occurring suspensions again is lower than it was in 2016 when investors were caught by surprise by the result and panic set-in,” he said.
UK property fund outflows
Investors have become increasingly jittery about the property sector freezing up as uncertainty over Brexit remains and the possibility of a no deal outcome has risen.
Last month clients pulled £198.9m from the sector nearly double the amount they withdrew in May, data from Morningstar shows. The sector has posted net outflows for the last nine months consecutively.
Total assets in the sector have dwindled by £3bn from £15.7bn in May 2016 before the Brexit vote to £12.7bn in June 2019.
Lowcock said there is a possibility they could be “acting early to avoid longer suspensions” ahead of a hard Brexit which is supported by both Theresa May’s potential successors, Jeremy Hunt and Boris Johnson.
A spokesperson for M&G told Portfolio Adviser that no other fund is impacted by the temporary deferral and said the decision to block withdrawals is “completely unrelated to Brexit”.
