News & analysis
Investors ditching property funds highlights liquidity risk fears
The recent suspension of M&G’s £2.5bn property fund has hit investors hard, highlighting the pitfalls of open-ended funds for illiquid asset classes.
At the beginning of December, M&G sus- pended its property fund following nearly £1bn in outflows, close to a third of the funds’ assets, raising fears of a domino effect in the industry.
M&G’s fund suspension brings back bad memories for property investors. In the aftermath of the 2016 EU referendum, a range of large property funds, including Standard Life, Aviva and M&G closed their doors to withdrawals. The crucial questions going forward are whether the suspension of the fund will affect simular funds and how could it impact institutional investors. M&G’s initial announcement had a signifi- cant knock-on effect. Within just two days following M&G’s fund suspension, inves- tors withdrew millions of pounds from similar property funds, as initial data from Morningstar suggests. For example, Aber- deen UK Property saw more than £30m in outflows on the day of the announcement and further £30m two days later. Janus Henderson and BMO’s property fund also reported high outflows.
This data is only anecdotal, most property funds don’t disclose flows daily. Data pro- vider Calastone suggests that investors withdrew some £100m from UK property funds within three days of the suspension.
Unlike the 2016 suspensions, a driving fac- tor behind the fears around property appear to be challenges to retail property due to the rise of online shopping, rather than the impact of Brexit, but M&G’s property fund had a 21.5% exposure to retail warehouses and 8.2% to shopping centres. Only 2.7% was invested with standard retailers. UK property funds had already faced a chal- lenging 2019. Some of the biggest funds, including Aberdeen UK Property, Aviva Investors’ UK property fund and BMO UK Property have returned -6% year to date, according to Morningstar. At the same time, unlike M&G’s property fund, most similar funds are also sitting on significant amounts of cash. Aviva’s fund, for example, holds around 30% of their portfolio in cash. M&G’s funds, which are now suspended, held only 4% of their port- folio in cash. High cash levels have been criticised for dragging down fund perfor- mance, but they could also offer a conveni- ent buffer in volatile markets.
INSTITUTIONAL IMPACT
Institutional investors have already grown quite wary of property as an asset class. It accounts for only 2% of the average institu- tional portfolio and during the past 12 months, some 18% of investors have reduced their exposure further, according to Aon’s latest Pensions Risk Survey. It is unclear whether institutional investors participated in the recent outflows since
UK Property fund outflows 2.12.2019 – 6.12.2019 Name Estimated Fund-Level Net Flow – comprehensive (Daily) 2019-12-02 GBP 2019-12-03 GBP 2019-12-04 GBP 2019-12-05 GBP 2019-12-06 GBP M&G Property Portfolio GBP I Acc Aberdeen UK Property I Inc Janus Henderson UK Pty PAIF I Acc BMO UK Property 2 Inc MGTS St Johns Property Athrsd Tr GBP Acc VT Redlands Prpty A GBP Acc Aviva Investors UK Property 1 GBP Inc -26.083.241 -125.820 -2.202.173 -184.454 1.595 51 -21.357 -1.565.224 -17.571 -380.397 229.506 15 1 396.818 -12.999.924 -31.569.546 -192.972 2.232.550 605 -120.106 -124.445 N/A -480.082 -201.198 -18.374 5 80.030 -388.951 N/A -30.801.433 -4.564.175 -322.564 8.710 7.996 N/A 2.501.044.108 1.342.044.986 536.222.177 503.502.925 201.165 105.811.051 142.531.237 06.12.2019 29.11.2019 05.12.2019 06.12.2019 06.12.2019 06.12.2019 05.12.2019 Source: Morningstar Fund Size GBP Fund Size Date
data providers such as Morningstar do not disclose who the sellers are. M&G did not respond to a request by portfolio institutional to identify who has pulled money from the fund. As long-term investors, institutions should be less vulnerable to short-term market movements such as property fund suspen- sions. On the contrary, the suspension could protect them from more dramatic losses.
But concern remains over
open-ended funds exposure to property, and it has caught the regulator’s attention. Schemes that have recently invested in property include Local Authorities West Yorkshire Pension Fund, South Yorkshire Pensions Authority, Nottinghamshire County Council Pension Fund and East Riding of Yorkshire Council (Investment Management) which collectively placed £85m with Triple Point Social Housing REIT, which is open-ended but focusses on social housing, rather than retail property. The fund’s performance has not yet been knocked down by the M&G suspension. In the wake of the Woodford scandal, the FCA has tightened the rules for open-end- ed funds in illiquid assets. From September next year, funds will be suspended if there is material uncertainty about the valuation of at least 20% of the funds’ investments. Moreover, fund managers in charge of illiq- uid assets will be subject to more stringent disclosure requirements about the liquidity of their investments.
6 | portfolio institutional | December-January 2020 | issue 89
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