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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When the Barber of Brexit comes to town, everybody gets a haircut.
I’m keeping my ponytail, thank you.
LOOL Shit’s getting real, REAL fast in England… Boris will have his work cut out him, UK will take it in the teeths end 2019. The irony of the situation, Prudential is already starting to make the headlines, the AIG of this cycle coming to a theatre near you!
Another insolvent phantom of tomorrow, as Eisenhower said. But at least they’ll have company.
It’s my money says the ……
not today it isn’t – you’ll just have to wait and SEE
I guess I qualify as a contrarian on BREXIT.
Assuming the UK does leave, I too suspect it will have a year or two of financial uncertainty, but UK will be better off for leaving sooner rather than later.
The fools managing (if that’s what you want to call it) the EU seem to think they can be as brutal with the UK as they wish, but the UK is a huge consumer for (replaceable) EU products.
As a reader of Napoleonic history, I’m focusing on 19th century France; parallels between undemocratic France and undemocratic EU are stunning. For the record, 19th century France tried all the following:
1st republic (cut off lots of heads)
1st Empire (Napoleon kills millions)
restored monarchy (Louie XVIII)
restored Empire (AKA Napoleon does Waterloo…)
restored monarchy
(2nd French revolution)
more monarchy
3rd French Revolution
2nd Empire (Napoleon III)
2nd Republic
3rd Republic
None of it really worked. EU “elites” (self-dealing know-it-alls) aren’t doing any better.
I share your opinion “ to a certain degree “ Jav!
Although I think the ( city of London) also known as the laundry capital will get its laundry machines transported across the channel !
This will cause huge collapse across the spectrum in the financial services sector.
The result of such occurrence should NOT be underestimated,
There will be lots of suicides and the Thames will carry away their corpses.
Not a pretty sight.
“Although I think the ( city of London) also known as the laundry capital will get its laundry machines transported across the channel !”
??????
Methink’s you need to study some law.
Many international loans and other transactions are written in London DUE TO ITS FRIENDLY LAWS.
England withdrawing from the EU will make London a friendlier placed to do business, for everybody except the smaller corporate in EU states hindered by EU law’s.
Note: The Swiss just told tehe EU to GO FISH over EU restrictions on Swiss financial practices and the Swiss still deal with London .
1″Free trade area” is all England needs to evade all EU Financial laws. The EU has already several “Free trade areas” as does Switzerland.
The city of London is almost a “Free trade area” in itself.
Jack,
Some laundry machines may well leave London but not many.
I can assure you that London is the centre of money laundering.
I can form a UK company in 24 hours for £12 (US$16). I can open a company bank account within 48 hours of that with a couple of phone calls; make some bank transactions; close the bank account and strike the company off for £10 (US$13). Try that anywhere else in the world.
If the next GFC or crash in the US is triggered by a credit crunch in the UK, there will be an odd poetic irony.
It was a Lehman/ UK connection that pushed the world of banking over the edge. When the decision was taken by the US Fed to let Lehman go bankrupt they apparently unaware that under UK law this required Lehman to cease transactions that second. Lehman with I believe thirty thousand employees had hundreds of millions in the air every second in Forex, etc.
But when the window closed in THAT second, if another bank or business, etc. had just deposited X million dollars for pounds, it was out that deposit. It was an unsecured creditor, with no deposit insurance.
That was when banks stopped lending to each other. let alone you or me or GM.
Great recap, thanks.
Lehman had a credit line with JP Morgan but abruptly got cut off. Lehman wanted access the window at the FED. Hank Paulson (from GS) then treasury sectry refused! Surprise!?
The long term enemies of BOND KING wanted it’s demise, very badly. It is all there, just search. Truth has to be sought out and NOT given at 6.30PM prime news!
If Paulson did that for Goldy, which wouldn’t surprise me, it was short sighted, because then it was Goldy’s turn in the barrel.
GS stock lost half its value in days, but it was allowed to become a bank holding company, allowing a Fed rescue. As I recall Lehman had been offered this status before the crisis but declined because it didn’t want the collateral oversight.
I’m saying this from memory so…..
One of the best short bits about this is Vanity Fair’s: ‘The Week Goldman Almost Died’ in their archive.
Nick Kelly:
The diff between Goldman and Lehman:
Goldman was….”….doing God’s work!” We are a Christian nation! LOL!
(Loyd Blankfein testimony before Congress in subsequent hearings!)
√
Except they gamed it out very badly before they did it.
A lot of people with 20/20 hindsight, still seriously regret the decision to kill the Bond King
In 1990 the second largest economy in the world started into depression due to real estate and stock market speculation. Japan’s stock market has not retraced its c. 1990 high in terms dollars to this day. Millions of Japanese homes are vacant.
About 1990 or 1991 the US went into a short mild recession due to a commercial real estate implosion. Some S&L banks had to be taken over by the FDIC; their assets auctioned off. The stock market corrected less than 20% before growing again until 2000.
What does Brexit have to do with the price of an office bldg. in England?
Was in Norman OK off and on during that time. Graffiti on boarded up S&L’s said something like “bank of fdic, new offices opening daily”.
But the real humor came out during digging through collateral…..$100K guarenteed a player would sign with U of O. Boz put up big billboard on freeway to OKC, saying “I told you so -Boz”….and a LOT of other funny things happened. Those rich oilmen in the stadium penthouses take football very very seriously. Should see all the limos arriving just before kick-off.
Humor aside, this could become a no joke thing, to people’s life savings and pensions. Still, like in 09, nobody responsible will do the jail time they should…..they never do. So the party goes on.
>What does Brexit have to do with the price of an office bldg. in England?
A lot of companies have a European office in London. Demand has already started switching to Dublin,Frankfurt and Paris (since a no deal will prevent euro clearing and other finacial servicea and possibly use of eu staff )
Suppliers will go where their customers are less demand with thr same supply lowers prices
It’s all taken care in case of no deal.
Do you think for even a moment clearing could be made outside UK under heavy socialist legislation?
https://wolfstreet.com/2019/02/22/with-disorderly-brexit-increasingly-likely-eu-blinks-on-derivatives-clearing-in-london/
“What does Brexit have to do with the price of an office bldg. in England?”
Foreign investors have been big buyers of UK properties, they’ve been propping up the London housing market in particular for years.
Brexit, with all the currency and asset price volatility that goes with it, endangers this.
– Welcome back to 2007 !!! (think: Northren Rock, Banque Parisbas)
I wish these folks good luck. I hope the assets will stay in their bubble form. This looks like the start of a bubble pop which could yield pence on the pound if it pops.
Funny, but I had the exact same thought in reading the headline about American housing bubbles starting to deflate. We saw the effect of that last time around. Those bad loans have a domino effect back to the lenders left holding the bag. Of course, its almost a law of nature that the next crash won’t be the same as the last crash. The generals are always fighting the last war, so that maybe, hopefully won’t cause such a crash this time around. But still, that decrease in housing prices has to stress some loans at the limit and things start to slow down and the goods based economy tips on over into a slump and that’s only 30% of the economy but still having 30% of the economy is a slump means a lot of people around the kitchen tables figuring out what they are going to cut back on and the effect spreads. And then somewhere in the middle it reaches the Brexit wave coming from across the pond. Lovely. Tell me again who decided that putting the bankers in charge was a good idea? Oh yeah, I forgot, it was the bankers.
Make sure the funds you invest in CANNOT be gated!
Treasuries come Sept/Oct will be interesting if the spending limit agreement goes kaput.
Nothing is that safe.
And the good news is that Trump wants to crash the value of the USD. Then nothing denominated in USD is safe.
Economics in Action
1) Capital Flight: When economy A (Japan, EU) has a return on capital that is excessively low, capital leaves economy A for another economy with higher capital returns, such as the US.
2) Economy A uses Dollars for US investments because the US does not accept Yen or Euros for US investment. The Dollars were earned via their exports into the US. Their dismal currency values made their goods artificially low in price to the US markets. They subsidized the US. This is good when US imports are for things the US does not want to make. It’s not good when they supply everything.
3) Since the US is running a huge fiscal deficit, it needs to sell a lot of debt via the UST. Thankfully, Economy A is being run into the ground via bad monetary policy. The capital flight from Economy A into the US buys down US financing rates, also repatriating capital from Economy A back into the US.
4) Japan and the EU are both being run into the ground via their respective monetary policies, which are a function of government policy. They are printing their way into prosperity, or so they think. US debt is being subsidized by bad economic policy in the EU and Japan.
5) If rates were ZIRP again in the US, this would not exist since there would be no reason for capital to come from Economy A into the US. Rates would be equally low everywhere. Thus, in the US, if ZIRP existed, there would be no interest income, thus less reason to save. Open borders for labor would cause wages to go down in the US, adding even less to savings. Printed money would replace saved capital. Asset bubbles would replace interest income. Open borders would also provide the lowest cost items available. Prices would fall except for those items with inelastic demand, such as education, health care, health insurance, farmer costs, and carbon credits due to a renewed interest in global warming. The rich would get richer. Everyone else would have what they were allowed to have.
6) In 2016, the scenario in point 5 actually existed except for the carbon credits. It got cut short because Hillary lost the election. Carbon credits were likely 2 years away.
7) Points 5 and 6 document why the Globalists and their Establishment flunkies hate President Trump so much. Even though Trump wants lower rates, I don’t think he wants them to go back to Globalist ZIRP levels again.
8) Disrupting the Globalist supply chain by any means necessary is saving the life of the USA
Remember something else about p 45.
he thinks a US default is a GOOD WAY of eliminating all that 22? TRILLION PLUS DEBT.
No wonde,r Vanguard started TWO money market funds at their brokerage early last year, for the same reason!
There is Vang Federal reserve M MKT – CANNOT Be gated and Vang Prime reserve M MKt which can delay the withdrawal request! Yield is a fraction difference.
OOPS Sorry. Please delete. Thanks.
I’m going long Entropy…
entropy always wins out. It’s like a law or something.
It’s what I named the Bentley. Rust never sleeps.
“The degree of disorder increases in any given system without external influence” – one formulation of the 2nd law of thermodynamics, known as the law of entropy.
Yeah, and it produces energy, too. Usually heat. More global warming? ;)
“Illiquid investment funds” are a stealth way of draining savings at a time when too many people have too much money to risk.
I imagine all sort of similar creepy things like M&G Investments and Woodford are going on in China. Credit crunches starting to surface and panic starting to grow till the big finale. No wonder the Fed guys are panicking.
I’ve enjoyed watching the whole Brexit circus. Watching an entire nation shoot its economy in both feet all because they don’t want to live next to a Polish plumber. Great fun! As of today, Parliament is thinking they’ve prevented a no-deal Brexit, and they do appear to have the votes to at least block what they don’t want. But, with the usual English arrogance, they mistakenly think they have the last word on the matter. They can vote to block Boris the Spider. But, the EU has to offer them an extension. And there were distinct hints last time around that the EU was getting sick and tired of the whole fiasco and just wants the UK out. Macron and the French were hinting this, so there’s some power in that position. If the EU won’t offer an extension, then Parliament can only sit there and sputter as the default position occurs. Or most likely, the EU will rub its hands and offer an extension only for a very high price. Boris the Spider might even laugh and think he’s won, before the economy crashes worse than during the great recession and Boris is quickly the most unpopular prime minister in memory. That might be the last laugh in all of this. Sitting back and watching Boris play the role of an already unloved leader who proceeds to preside over a huge, self-inflicted disaster.
>. If the EU won’t offer an extension, then Parliament can only sit there and sputter as the default position occurs
Actually they can vote to revoke art 51 and not actually leave .
Which might piss the EU off even more,especislly with Boris as a combative mp constantly threatening to start the whole process again unless he gets have his cake and eat it.
√
Not going to happen – contemporary politicians on both side of the Atlantic are more interested in getting their hands on and keeping them on the reins of power than they are of the heath and welfare of the nation over which they preside…
Third-world thinking going on in the USA and the UK in that respect.
If the Tories revoked A51, or even offer a second referendum, they know that will be them done for the next decade.
Sad to say, they’d rather govern over disaster that not govern at all.
They’ve completely lost their autonomy to the unelected bureaucracy of the EU and you call it a polish plumber?
Ammm, no you got that wrong.
It is not the case of “nation not wanting to live next to the polish plumber “.
It is the case of “nation not wanting to be ordered by …….(fill gaps), to live next to the polish plumber”.
Can you see the difference?
Boris is just popular enough for PM while unloved enough within the Tory party to be the perfect choice for “person left holding the unpinned grenade” that Brexit has become.
Boris is also enough of a sociopath to just cancel A.50 with an entertaining flurry of bon mots and incoherent speech.
”They” have to get Brexit rammed through before Boris figures out that whatever he does, the Brexiteers will bellow “Betrayal!”, meaning that the good Boris can achieve the same results with zero work. No work and no ethics is The way of the Boris.
An overly dynamic situation as we say.
“de-risking” (!)
Don’t you just LOVE creative language?
We may not have to leave the EU at this rate.
If contagion blows the ECB/PIIGS, which it could given the ‘self-cert’ testing they appear to have been doing, then the EU may not exist for long any way.
UK property market’s on the turn – who ya gonna ‘liquidate’ to, particularly in a country whose future economic prosperity is:
a) predicated on a mountain of debt
b) looking parlous with Brexit on the horizon..?
Oh well, at least there’s the solid manufacturing base to fall back on.
Oh…
Coffee shops, tattoo parlors, online gambling and payday lenders it is, then!
Plenty of people to liquidate to at the right price.
But no one is willing for price discovery to occur.
I suppose even at zero trade volume, values still crash as the sentiment is still clear to see.
A very interesting aspect of a brexit is that the clearing of € denominated bonds etc simply can not continue in the City of London simply because the UK is then neither a member of the EU nor Euroland. It is an impossibilty for Euroland to allow that the clearing business takes place in a country that is neither a member of the EU nor Euroland. It would be like the clearing of USD business would take place in Mexico City. The USSA would neither allow that.