UK property funds: M&G the Unready

Is an “open-ended property fund” an oxymoron? Angry investors might well think so after dealings in the M&G Property Portfolio were suspended on Wednesday. The UK-listed asset manager could not say how long they will have to wait to withdraw funds. A promise to waive 30 per cent of its annual charge will be little consolation.

Seven open-ended property funds had to halt redemptions in 2016 after the Brexit vote. They could at least say it had come as a surprise. This time the culprits were well-known trends M&G might have protected itself from better: Brexit uncertainties and the decline of physical retailing.

Concerns have been mounting all year over the faltering health of shops. M&G’s fund, with 37.5 per cent of its value in stores, was particularly exposed. It lacked a decent buffer, with cash accounting for just 5 per cent of its holdings at end-October, according to Morningstar. Comparable funds hold more: cash levels ranged from 8 per cent to 24 per cent at the end of 2018 in a sample of funds analysed by Fitch.

Property funds do not have a monopoly on gating. But they vividly illustrate the problems posed by open-ended funds with illiquid investments. There is an intrinsic mismatch between the time it takes to sell real estate and the daily redemptions offered to investors. Regulators have been increasing checks on property funds. From next September, they will have to halt trading if there is “material uncertainty” about the value of 20 per cent of their portfolios.

That makes sense, as far as it goes. When there is a rush for the exits, suspensions protect investors at the back of the queue. But they do not stop jitters running through the queue. The risk of contagion looms large as spooked investors withdraw cash from other funds. The latest suspension hammers home the lesson of the Woodford Equity Income Fund collapse: the UK needs a tougher regime for open-ended funds with illiquid assets.

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Fans say these funds allow small investors to diversify. Yet they are often lousy investments. Returns are curbed by the need to hold the cash that supports liquidity. Worse, their strategy is dictated by the ebb and flow of investor sentiment. Retail investors tend to invest near the top of the cycle and flee near the bottom. That is a big barrier to savvy investment by fund managers. Investment trusts do not need to sell assets when short-term investors turn bearish. They are a better and safer bet.

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