Investors in the frozen M&G Property Portfolio have forked out over £100m in fees since the EU referendum, during which time the fund has delivered lacklustre returns and been suspended twice.
The calculations, courtesy of the Financial Times, have come to light days after the M&G UK property fund’s second gating in three and a half years. It was among the wave of property funds that halted trading in the aftermath of the Brexit vote.
The FT calculated the fees paid by investors in the M&G fund based on its ongoing charge and assets held. The fund has nearly halved in size since it was first suspended, falling from £4.4bn in June 2016 to its current £2.5bn of assets.
But the newspaper noted that some of the fees would not have been retained by M&G but used to cover routine services like administration and auditing. It added that investors in the fund paid around £70m over the period in separate property expenses which spanned day to day costs of running buildings and did not go to M&G.
M&G declined to comment.
Fees discount not good enough
M&G Investments blamed ongoing Brexit-related uncertainty and shifts in the retail sector which it has heavy weightings toward for the “unusually high and sustained” outflows which triggered the suspension.
The asset manager has said it will waive 30% of its annual charge on the fund, which is marketed to retail investors, during the suspension, marking a change from the previous four-month suspension in 2016 in which no fees were waived.
SCM Direct co-founder Alan Miller told the FT the discounted fees during the suspension was “a step in the right direction but still insufficient”.
“Why should an investor wanting to sell but unable purely because the manager has unsuccessfully managed the liquidity of the fund, be forced to pay more than a nominal fee during the suspension period?”
The M&G Property Portfolio has consistently been in the bottom quartile of funds in the IA UK Direct Property sector over one, three and five years, according to data from Trustnet. Over the last year the fund has handed investors a loss of 7.8%, far worse than the sector’s -0.1%.
Tilney managing director Jason Hollands disagreed the fund should waive its fees entirely, noting there are costs to manage during the suspension including selling holdings down to shore up liquidity. “I think they have done the right thing in proactively stating they will cut their fees during this period,” he said.
Trust in investment industry shaken post-Woodford
Since the M&G property fund suspended rival UK property funds have attempted to convince investors they have enough cash to meet withdrawal requests.
BMO Gam and Janus Henderson have quoted cash levels of 25.3% and 16.7% respectively in their property funds compared with M&G Property Portfolio’s 5% position.
But Louis Tambe, fund analyst at FE fundinfo, said it is difficult to tell whether there will be a contagion effect given investor trust in the industry is shaken following the blow-up of Neil Woodford’s fund empire.
“If the lessons were learned after the widespread suspension of property funds in 2016, then one might hope that many investors will have factored this into their initial decision making and are happy to stay invested in funds for the long term despite the current illiquidity,” said Tambe. “However, given the trust in the investment industry is low following the Woodford affair, this may not be an easy decision to take.”
Hollands said it was important for investors to remember that “this is a very different set of circumstances to Woodford”. “For a start, this fund is not a dog performer and has a quality underlying portfolio,” he said.
Prudential UK property fund suspends
A day after M&G announced its property fund was frozen, Prudential confirmed its UK property fund had also closed up shop temporarily.
Tambe said the suspension of the £660m fund was unavoidable given the fund was fully invested in the M&G Property Portfolio and did not have enough of a cash buffer.
This is the third time Prudential has blocked investors from taking cash out of its UK property fund. It was suspended, alongside M&G Property Portfolio, in the aftermath of the EU referendum. Pru also blocked redemptions from the fund this July, a move it was careful to distinguish as a “temporary deferral” instead of a suspension to avoid comparisons with Woodford Equity Income fund.
The Prudential UK Property fund, which buys units in the M&G Property Portfolio, has also struggled to deliver positive returns this year and is down 1.4% over one year.
