Another “run on the fund.” More investors can’t get their money out but contemplate big losses.
By Nick Corbishley, for WOLF STREET:
In what is beginning to look like a trend, another British open-ended fund slammed its doors on investors today. After a surge of redemptions, M&G Investments, the fund management arm of UK insurance giant Prudential, decided to halt dealings in its direct property fund, which has more than £2.5 billion ($3.2 billion) in assets under management, as well as its feeder fund.
In July, M&G had already suspended redemptions at one of its property funds, with assets of just over £650 million, which intensified the pace of redepemptions from its other property funds. Today, the company extended the suspension to cover all of its funds.
The company said that M&G Property Portfolio was suspended after “unusually high and sustained outflows” triggered by “Brexit-related political uncertainty and ongoing structural shifts in the UK retail sector.” According to Morningstar, investors have yanked an estimated £900 million from the fund in the first ten months of this year. The portfolio had only one month of positive flows since Britain voted to leave the EU in June 2016.
“Given these circumstances, we have now reached a point where M&G believes it will best protect the interests of the Funds’ customers by applying a temporary suspension in dealing,” the fund said in a statement.
M&G Property Portfolio invests in commercial properties across the UK including offices, industrial property and retail parks, a sector beleaguered by retailer failures and crushed values. According to the FT, around 37% of its portfolio is held in retail warehouses, shopping centers, designer outlets and standard retail, and another 2.5% in supermarkets.
Following the announcement of the suspension of the fund, shares in M&G dropped 2.6%, while the value of the property portfolio fund tumbled to its lowest level in six years. The fund is the worst performer in the IA UK Direct Property Sector in the past three years. Year-to-date, the fund is down 7%, according to Morningstar.
It also has one of the lowest cash levels in the industry: just 5% of total holdings, according to the FT, or 10%, according to Morningstar, likely depending on the timing when the measure was taken. Both agree that these cash levels are among the lowest in the industry. This makes the fund acutely vulnerable to a classic “run on the fund.”
As an open-ended property fund, M&G had no choice but to sell assets in the portfolio to raise enough money when investors took their money out. This is not a problem when the assets in question are highly liquid, such as large-cap stocks. But when the assets are high-yield bonds, loans, large positions of thinly traded small-cap stocks, or commercial real estate that can take days, weeks or even months to sell, there is a mismatch in liquidity between what the fund offers to its investors (daily liquidity) and what the fund holds (largely illiquid assets), and this is a big risk with these types of open-end mutual funds.
“The suspension will allow the fund managers time to raise cash levels to pay redemptions, whilst ensuring that asset sales are achieved at market prices and investors in the Fund are safeguarded,” M&G said. The suspension will be monitored daily and reviewed every 28 days. M&G said the fund will re-open “as soon as liquidity levels have been sufficiently rebuilt”.
It all sounds drearily reminiscent of what Neil Woodford told the beleaguered investors of his £3.7 billion flagship Woodford Equity Income fund (WEI) in June, just after he slammed the doors shut on them. They were told that by December, the doors would be opened again after he had sold a large chunk of the fund’s assets at, or as near to market prices, as possible. Instead, it was decided that the fund would be wound up and all assets would be liquidated. According to preliminary estimates, investors could lose over one-third of their remaining principal, on top of the losses they’d incurred when the fund was still active. Many of those investors are retail investors or pensioners on modest incomes.
In the case of M&G Property Portfolio, its investors range from retail investors to institutional investors. The fund has said it will waive 30% of its annual charge to investors while they are unable to access their money, which is slightly better than the treatment Neil Woodford meted out to his investors. From the day WEI was gated, to the day the decision was finally taken to wind up the toxic fund, the now-disgraced former hedge fund legend collected full management fees (£65,000 a day) despite widespread public and political criticism.
But arguably the biggest legacy of Woodford’s demise is the loss of confidence of investors in funds that invest in assets that take a long time to sell, but from which those same investors can withdraw their money at any time.
The reverberations are already being felt across the industry, as investors begin wondering just how safe it is to entrust their savings with fund managers that may have similar liquidity mismatches to Woodford’s and M&G’s, and these investors are further incentivized to rush for the exits of their open-end mutual fund, to benefit from the first-mover advantage before the fund gets too damaged and is gated, leaving them twisting in the wind. And this by itself could precipitate even more runs on the fund. By Nick Corbishley, for WOLF STREET.
How slow-poke investors in conservative-sounding mutual funds can get their faces ripped off. Read… “Run on the Fund”: The Big Risk of Bond Mutual Funds. What to Look For and What to Do
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I just realized, I can blame all my problems on mismatched liquidity.
Reference to ‘cash-flow issues’ is more traditional, I think.
Euphemisms can be very useful when you want to avoid admitting to boneheaded financial management mistakes. It’s a big reason why corporate boards are always on the lookout for innovative business buzzwords.
Here’s a nice buzzword big, upper management can use, courtesy of the White House: peanuts. And, that’s exactly what M & G depositors will end up with…
This shouldn’t be a surprise; when CBers bought up Treasurys that actually paid a yield, junk bonds and CLOs couldn’t catch a bid. Econ101–there is no free lunch. Here comes the implosion!
Comment of the day.
Ha! Good one.
I too found myself recently suffering from “unusually high and sustained outflows” triggered by “(some adjectives) uncertainty and (more adjectives) shifts…”
It felt like Nick had secretly written my biography.
Not only did it explain my finances,
But it described my job, my love life and my digestion in one fell swoop.
Anything that goes wrong in the UK is blamed on Brexit.
Brexit is the excuse for going bankrupt, laying people off, and closing down factories.
The life of financial parasites like Woodford and M&G is often a precarious one because their assumptions and their goals are often unrealistic, which is to say, massaged for the benefit of unwary investors.
The situation is much different for those of us who are organised to steadily accumulate productive economic surplus, rather than engage in dubious acrobatics to generate uncertain short-term profit.
It’s starting to seem like “Distressed UK mutual fund” is now a redundant phrase!
I know others here are more expert than I am on this, but I’m pretty sure that in the US this sort of real-estate investment scheme would most likely have been structured as a REIT, would trade as a stock on an exchange, and therefore would not have a liquidity mismatch risk. Right?
So why does the UK even allow this type of fund to exist?
And then I’m thinking Prudential isn’t dumb, so was this short-lived UK mutual fund deliberately set up to benefit the sellers of the affected properties, rather than the buyers of the fund? Alternatively, could the “run on the fund” have been engineered to produce distressed sales for the benefit of others wishing to pick these properties up at a discount?
And since everything else seems to be used for money laundering – how could this fund structure facilitate that?
Finally, I’d like to thank Nick for yet another great article.
How did the system break…
Very slowly then all of a sudden.
When people get wise, they will suddenly try to get their funds only to find it is too late as either bad trust, greed or bad timing has locked them in to losing it all.
WeWorked some folks…
1. Kinda just like negative interest rates!
2. What in the heck – Why are pensioners on modest incomes putting their money in this stuff? Contrary to popular opinion – there are still very safe investments that pay a positive return.
++++
“According to preliminary estimates, investors could lose over one-third of their remaining principal, on top of the losses they’d incurred when the fund was still active. Many of those investors are retail investors or pensioners on modest incomes.”
Why are pensioners on modest incomes putting their money in this stuff?
Their financial advisors are not fiduciaries.
Those who panic first – panic best!
“and these investors are further incentivized to rush for the exits of their open-end mutual fund, to benefit from the first-mover advantage before the fund gets too damaged and is gated, leaving them twisting in the wind.”
Those who panic first – panic best!
Now is not the time for M&G investors to panic. They should have done that a long time ago.
Now you see why we have the Fed Repo.
Regulatory enforcement would be more cost-effective. But it would also be less profitable for the predators.
In case you’re wondering, yes, people do look at me like I have two heads. Mostly they sneer.
It would be interesting to see how that 37% of the M&G portfolio was allocated.
Retail warehouses are fine for now: there’s still enough growth left in online sales to keep the wheels spinning for a while, albeit margins are rice paper thin and competition more than cutthroat.
But the rest… “shopping centers, designer outlets and standard retail”… one just has to pray M&G was somehow even more invested in this stuff and had been shedding this toxic waste at a steady pace before redemptions started to come in thick and thin.
But judging by what I am seeing lately people are still living in a parallel universe when it comes to brick and mortar retail. Money is pouring into it at what looks like an accelerating pace, and is being wiped out at an accelerating pace. I’d say it serves them right for ignoring reality but I fear a big bailout is just around the corner for brick and mortar retailers as well.
B&M retail is expected to make something of a comeback for various reasons, not all of them related to large-scale online identity theft and nasty practices by online retailers and their associates. Online and otherwise, the customer base is not what it used to be, and is becoming less so all the time. Perhaps unfortunately, there may not be any opportunity to discuss it later in detail.
For what it’s worth, let me give you the truetrue. I formally predicted the eventual prominence of online retail in April 1997 to a conference of business managers. They scoffed at me. They also looked at me like I had two heads, and called me names when they thought I wasn’t listening. That was predictable. I expected they would. I didn’t mind. I never mind. Among other things, for many years I’ve designed and presented targeted, accurate predictions for the purpose of eliciting derogatory responses for later analysis, to get a clear picture of the mass psychology and epistemics of contemporary business and political leadership. My findings won’t be published, so you’ll never see them, which is just as well, because if you did, you would wish you hadn’t, and I don’t want to be cruel. It’s going to get ugly. After that, it will get weird ugly. A lot of people have figured that out, without my help, and without formal analysis. They get scoffed at too.
I see a bounce back for B&M but only from a much lower level than what it has now. The mall stores still need to loose 2/3 of its sales
Unamused,
You amuse me that you have all these predictions that you won’t disclose.
How are you going to say “I told you so”?
At least people like Peter Schiff, Marc Faber, Gerlad Celente keep telling us it is going to crash every week since 2008 and one day they will be correct and can say they told us so.
How can B&M retailers be bailed out? Modern retailers lease/rent everything, and i mean everything so pumping money in them and getting the result you want is way to hard. The would structure their losses so that the money ends in the directors bank accounts.The mall (and its stores) for every 100k persons is death and wont come back. The only mall-stores left are the to-cheap-4-www stores like Primark and brand stores that do 90% on the web.
There are those that think taxing B&M less would help. In the very long run that is true but in the short run it would be bad. The money men would look at the books, see that they are bad even with that big boost and would say bye bye.
When the stampede starts, it’s too late. You are certain to get trampled (and you get pennies on the dollar when you can get out)
If you have any investments that fall under these categories:
‘assets are high-yield bonds, loans, large positions of thinly traded small-cap stocks, or commercial real estate’
I highly recommend you hit the ‘sell’ button immediately.
Almost half of Americans work in low wage jobs. It is becoming more difficult to afford a home as house flippers try to corner the real estate market.
https://www.cbsnews.com/news/minimum-wage-2019-almost-half-of-all-americans-work-in-low-wage-jobs/
Hasn’t that always been true?
The US has a big problem with dodgy private equity (like WeWork)…
The UK has a big problem with dodgy public equity (like Woodford)…
WeepWork.
Be aware – in the US mutual funds and ETFs only hold a small percentage cash and in a big downdraft when investors flock to safety and sell those funds have to sell what they hold to meet redemptions. Granted the stocks they hold are more liquid than a warehouse or loan, but in a big sell off stock values can swoon mightily. Very few mid age or younger have ever been thru a big sell off.
The suspension will allow the fund managers time to raise cash levels to pay BONUSES, whilst ensuring that asset sales are achieved at market prices and investors in the Fund are SCREWED.
FIFY
That’s sounds like proper practice. Another method proven during the last crisis was to take over someone else’s book, do a tough and honest review, mark it down to nothing (what a bunch of crooks the previous team was!), then – through sheer alpha and hard work – recreate value and mark the same book up again to where it was. And of course receive the performance bonuses agreed for the new management.
Time to review very closely any mutual funds (and ETFs!) one has in the portfolio. Anything that’s not very liquid large caps is held at one’s peril.