Prudential has suspending trading in a number of property funds linked to the M&G property fund, which was suspended this week.
M&G Property Portfolio suspended dealing on 5 December - it has more than £2.5 billion in assets under management, to stem the tide of investor redemptions. Investors will not be able to buy or sell units in the M&G Property Portfolio fund.
Just days before the General Election, the company said “unusually high and sustained outflows” have forced the temporary suspension of the funds, blaming Brexit uncertainty and the UK retail sector’s woes for making it difficult to sell commercial property. The fund invests in 90 commercial properties across the UK including retail parks and offices.
“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.
Pru said it had been lowering its exposure to UK property since the beginning of the year, and the suspension of its funds does not impact its PruFund Growth, PruFund Cautious, Risk Managed PruFund range or Risk Managed Passive range of funds, none of which invest in M&G Property.
But around 19,700 Pru customers will be affected by the suspension - the Prudential M&G Property Portfolio fund is fully invested in M&G Property Portfolio. Prudential said it would write to investors and advisers to explain why it had taken this action and how it will affect their investment.
Ramping Up Cash Holdings
Property funds have been upping their cash levels this year amid fears over redemptions. A Morningstar investigation found that only one fund in the sector, BMO UK Property, rebates fees to investors when cash reaches certain levels.
Cash levels in the M&G Property fund are among the lowest in the sector at just above 10% - not far from its upper limit of 12.5% for cash holdings. While ongoing charges are among the lowest in the Investment Association UK Direct Property sector, its has been the worst performing fund in the sector year to date, down 7%.
Jonathan Miller, head of fund research at Morningstar says: "While bricks and mortar property acts as a portfolio diversifier that also provides an income, we’ve continually flagged there’s a mismatch between its illiquid structure and a daily dealing fund.
"There hasn’t been enough of a buffer here, nor the ability to swiftly sell assets to meet redemptions. Even though M&G is waiving part of the management fee during the suspension period, we can’t be far away from the regulator stepping in regarding issues in this space."
M&G will waive 30% of its annual charge while the fund is suspended to reflect the fact that investors will not be able to access their money. 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”.
Adrian Lowcock, head of personal investing at Willis Owen says the fee waiver is an appropriate gesture but adds: "Of course this will, once again, raise the question of whether illiquid assets should be held in an open-ended structure. The open-ended structure simply does not work if the investors in it do not share the same long-term perspective. This should serve as a reminder to investors to only consider open-ended property funds if they are unlikely to need access to their money quickly.”
The abrupt suspension of the fund comes as the Woodford debacle is fresh in investors’ minds as its authorised corporate director Link Fund Solutions revealed a plan for the future of the Income Focus should be finalised by the end of the month.
