Is the Woodford Income Fund saga in replay? Property or unlisted shares – both are hard to sell.

M&G Investments suspended dealings in its £2.5 billion M&G Property Portfolio with effect from midday on Wednesday due to sustained redemption pressure.

Investors have been bailing from the UK property fund amidst the uncertainty forced on the property market due to Brexit. The fund faced withdrawals of nearly £992 million over the past year, during which period it lost 7.9%.

“In recent months, continued Brexit-related uncertainty and ongoing structural shifts in the UK retail sector have prompted unusually high outflows from our property fund,” the fund management wrote to investors.

M&G Property Portfolio: History repeating itself

Fund suspensions in times of market upheavals have happened before.

Each occasion reinforces the argument against holding illiquid assets in open-ended funds. Property funds for retail investors allow daily transactions but it can take much longer, even months, to sell properties. This raises the risk of a liquidity crunch.

The last such “run” on funds took place around the time of the Brexit referendum. On that occasion, several physical property funds were ‘gated’ following an avalanche of sell orders from panicked investors. Investors withdrew £2.3 billion at the time.

The same thing happened before that, at the time of the global financial crisis.

This time it’s Brexit – again. However, the M&G Property Portfolio is hamstrung from its exposure to retail property. That sector faces problems due to retailer failures and bearish property values. The fund has about 40% of its property portfolio in retail.

However, the crisis at the Woodford Equity Fund a few months ago bears very similar overtones to the current liquidity problems facing the M&G Property Portfolio. The only difference, the fund managers at Woodford were trying to sell off illiquid unlisted shares, while M&G is struggling with physical property.

M&G Property Portfolio: asset sales

M&G managers Fiona Rowley and Justin Upton have already sold 14 properties for a total of £374.8 million up to the end of October. Evidently, it was not good enough.

“Given that these circumstances and deteriorating market conditions have significantly impacted our ability to sell commercial property, we have temporarily suspended dealing in the interests of protecting our customers,” said the letter to investors.

M&G said fund managers need time to raise cash to meet redemption calls. Simultaneously, it needs to safeguard the interests of the investors by ensuring that it sold assets are fair values.

New rules for property funds

According to new rules that take effect next year, property funds must halt trading if there is uncertainty about the value of 20% or more of their assets. According to analysts, this may not serve its intended purpose.

That’s because the basic problem remains – the mismatch between the underlying assets and the kind of liquidity offered to investors.

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