This time, a fund liquidity crisis traps institutional investors, including pension funds.
By Nick Corbishley, for WOLF STREET:
Less than a week after the Bank of England issued a warning about the systemic risks posed by illiquid investment funds, news has surfaced that another run-on-the-fund caused fund managers to suspend withdrawals: This time, it’s M&G Investments, the fund management arm of UK insurance giant Prudential, that has suspended withdrawals from one of its property funds.
The move come into force last month and was apparently triggered by a rush to the exits from a number of big clients, most of whom are large pension funds.
Restrictions were also placed on certain withdrawals from the Prudential UK Property fund, which feeds into the M&G fund. According to The Daily Telegraph, around 8,000 people have money in the fund, of whom around 5,000 – those aged less than 55 – will not be able to access their funds until the restrictions are lifted.
“Our customer base consists of large pension funds which invest with us for the very long term,” M&G said. “Some schemes that have been invested with us in this fund since the 1970’s are de-risking, which is why it is now in temporary deferral.”
This flurry of redemptions — a classic run on the fund — has forced M&G’s property fund to sell properties in its portfolio, which include British retail parks, offices and industrial property, to raise enough money to meet withdrawal demands. These are not exactly liquid assets and they can take months, if not longer, to offload at prices above bargain basement level, which is why M&G has suspended withdrawals for clients for up to six months.
“Occasionally we put withdrawal requests on hold for this type of fund, which enables us to get the best price we can for property we are selling within it,” M&G said.
This is not the first time M&G has had to suspend withdrawals from one of its property funds. In July 2016, amidst the turmoil that roiled UK markets immediately following the Brexit vote, the M&G Property Portfolio, a £4.4 billion fund, was one of six commercial real estate (CRE) funds that opted to temporarily suspend redemptions as a flood of investors rushed for the exits.
In total, M&G looks after £321 billion of assets on behalf of six million customers. The property fund itself has around £660 million of assets, down from £760 million two years ago, and is aimed exclusively at institutional investors such as pension funds.
M&G’s latest move has evoked comparisons with Neil Woodford’s decision at the beginning of June to ban redemptions from his Equity Income Fund, preventing hundreds of thousands of investors, including public pension funds, from being able to access their money. Like the managers of many other open-ended funds, Woodford offered clients the possibility of yanking out their funds at just about any moment while pouring money into assets that could take weeks or months to sell in an orderly fashion.
Now, Woodford is desperately trying to offload his more illiquid assets, including his unlisted biotech investments, which are to be bundled into multiple portfolios for auction, as well as some of the assets he listed on the minuscule Guernsey-headquartered International Stock Exchange, which has barely any trading activity. In the meantime, another one of his funds, the Woodford Income Focus fund (WIFF), lost a third of its assets in June alone, as investors continue to abandon funds under his management.
Granted, there are big differences between the M&G property fund and Woodford’s Equity Income Fund. For a start, investors in the M&G property fund are institutional investors, which tend to be less vulnerable to volatility in investor flows, partly because they don’t offer daily trading. Also M&G is more upfront about the liquidity risks of investing in its property funds.
One big thing the two funds do have in common, though, is the glaring mismatch between the speed at which they can offload assets and the rate at which investors can demand their money back. And right now, with the risk of a no-deal Brexit arguably higher than at any other time since the 2016 referendum, UK-based property funds like M&G’s are once again coming under pressure.
M&G claims its recent decision to gate the property fund had nothing to do with Brexit, but investors in the UK are getting increasingly jittery as Halloween 2019 — the new date scheduled for British withdrawal from the EU — approaches, especially with the odds of pro-leave Boris Johnson being chosen to succeed Theresa May as prime minister rising by the day.
The uncertainty surrounding Brexit has spooked property investors. Since late last year, waves of redemptions have hit UK commercial real estate funds. Between October 2018 and May 2019 the total amount of funds under management in the UK property fund sector tumbled 5.5%, from £32.5 billion to £30.7 billion, according to data provided by the UK Investment Association. According to the European Securities and Markets Authority (ESMA), real estate funds “have one of the highest shares of retail investors which, given potential liquidity risk, is a concern.” That’s probably putting it lightly. By Nick Corbishley, for WOLF STREET.
$30 trillion of assets globally are held by open-ended funds. Read… Liquidity Crisis at Woodford Equity Fund Is Symptomatic of Systemic Problem, Bank of England Warns
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