Bank of England is expected to reveal new plans to address problems among property funds
Thursday 12 Dec 2019 Author: Tom Sieber

The risks associated with open-ended property funds have been brought home to investors again as trading in M&G Property Portfolio (B89X8P6) and Prudential M&G Property Portfolio (0537296) is suspended.

These events provide an uncomfortable reminder of the immediate aftermath of the Brexit vote when several funds in the space had to be ‘gated’ thanks to a wave of panic selling and, more recently, the suspension and planned liquidation of Woodford Equity Income Fund (BLRZQ73).

There are differences now in that the suspended funds are linked – they are both from the M&G stable and the Prudential fund itself invests directly in the M&G fund.

Reports suggest the suspension of the latter was partly triggered by large selling by other managers within the wider M&G group. This raises questions over whether other investors who are now trapped in the fund should have been informed earlier on.

The structure of open-ended funds means they are more likely to run into liquidity problems than closed-ended funds. When investors sell or redeem their holdings in an open-ended fund, managers have to sell assets to meet these redemptions.

It’s important to be able to buy and sell funds whenever you want but daily liquidity with property funds doesn’t work like that. It can take months to sell a commercial property holding.

Funds often hold back money as a buffer against redemptions, something which impacts performance due to the low returns from cash.

The problem is becoming acute again due to the sheer level of outflows from property funds. According to Investment Association data the UK property sector recorded its 13th consecutive month of outflows in October with £1.8bn withdrawn.

The problem is exacerbated by some funds’ exposure to retail assets where valuations are collapsing amid the shift to online retail.

There looks to be something of a domino effect from the M&G suspension. Nearly £100m was taken out of other UK property funds in the two days immediately after trading was suspended on the M&G and Prudential products, according to funds transaction network Calastone.

The Financial Conduct Authority is looking to address the issue with regulation, introducing improved oversight and forcing funds to explain the risks more clearly and come up with detailed plans to deal with liquidity issues.

However, these changes aren’t currently set to be introduced until September 2020 and, with the situation becoming more and more pressing, the Bank of England is expected to reveal its own proposals in the coming days.

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