M&G property fund suspension brings further scrutiny to FCA rules

The suspension of an M&G property fund reflects badly on the Financial Conduct Authority just over a month after its final rules into liquidity mismatch on daily dealing open-ended funds.

M&G Investments announced on Wednesday it was suspending dealing on its Property Portfolio and feeder fund thanks to “unusually high and sustained” outflows.

Redemptions from the £2.5bn fund have coincided with Brexit uncertainty and shifts in the UK retail sector making it difficult for the managers to sell commercial property, a press release announcing the suspension said.

M&G said it will waive 30% of its annual charge on the fund during the suspension.

Suspension reflects badly on recent FCA rules

The latest suspension reflects badly on the FCA, according to AJ Bell head of active portfolios Ryan Hughes.

“The FCA released its final rules on property funds last month, meaning we’re more likely to see fund suspension when valuations are uncertain, but it shied away from actually banning these illiquid assets being held in daily dealing funds,” Hughes said.

“Bearing in mind the fundamental mismatch between the underlying assets and 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.”

At the time, the regulator was criticised for the limited scope of its final rules, which were focused on non-Ucits retail schemes and did not extend to funds like Woodford Equity Income, which suspended in June.

SCM Direct co-founder Gina Miller questioned why the regulator allowed these funds to be marketed at retail investors given the liquidity mismatch.

Miller did not like the “caveat emptor” approach the FCA took towards Nurs funds.

The regulator’s additional requirements for these funds included increased disclosure of how liquidity is managed, standard risk warnings in financial promotions, enhanced depositary oversight, and a requirement to produce liquidity risk contingency plans.

Property funds suffer nearly £1bn of withdrawals

Tilney managing director Jason Hollands said the suspension echoed the aftermath of the Brexit referendum, which resulted in a domino effect across the sector. Hollands thought political uncertainty surrounding the general election could be compounding the problem but said that could be resolved by next Friday depending on the result.

Investment Association flows figures show investors have pulled £902m from property funds in the year to date with April suffering the biggest monthly net redemptions with £338m exiting the sector. March was the only month of inflows with property funds taking in a mere £9m.

Investment Association property fund sales in 2019

The M&G fund used to be the largest in what is now the Investment Association UK Direct Property sector holding £4.8bn in the month before the Brexit referendum but investors have since pulled billion of pounds from the fund.

At the end of 2018 and heading into 2019, property funds were switching pricing mechanisms and building up cash levels as redemptions from the UK Direct Property sector hit £315.6m in December. At the time, M&G moved its cash levels above its 7.5% to 12.5% range to 15%.

But Morningstar UK manager research director Jonathan Miller said cash reached 5% at the end of October, having hovered between 6% and 10% for most of 2019.

“Many other comparable funds are much higher on this side,” Miller said. “There hasn’t been enough of a buffer here, nor the ability to swiftly sell assets to meet redemptions.”

Internal ACD responsible for suspension

M&G said the suspension would allow the fund managers time to raise cash levels to pay redemptions while ensuring asset sales were achieved at market prices.

Orders placed after midday on 4 December would not be accepted. Investors will be updated via the website with a formal review taking place every 28 days and the situation monitored daily.

M&G’s internal authorised corporate director, M&G Securities Limited, made the decision in agreement with the depositary. The FCA has been informed.