M&G Property Portfolio and its Feeder fund have been hit by severe outflows since reopening for dealing on 10 May, giving investors the first chance to take their money out since trading in the open-ended real estate fund was suspended almost a year and a half earlier.
Investors withdrew £806m from the main fund last month, according to Morningstar estimates, shrinking its assets from £2.1bn of assets to £1.3bn by the end of May.
‘The M&G Property fund is one that is widely owned, particularly by retail investors and therefore the extent of the outflows was always likely to be high once investors had a chance to redeem their investments,’ said Ryan Hughes, head of active portfolios at AJ Bell.
A spokesperson for M&G said they did not comment on fund flows outside of reporting periods but that they had been consistent with expectations.
Investors’ money has been trapped in the fund since December 2019, when M&G suspended dealing as it said it was unable to meet redemptions amid Brexit jitters in the commercial property market. The portfolio was worth more than £2.5bn at the time. Managers of rival open-ended property funds went on to gate en masse at the onset of the coronavirus pandemic.
With the announcement that the fund would reopen, M&G reported there had been £703m of asset sales since the suspension, with a further £253m worth of property either exchanged or under offer.
The group said that fund manager Justin Upton was moving ahead with some of those further sales and continues to target 20% liquidity in the portfolio. Holdings in real estate investment trusts (Reits) represent further easy-to-sell assets, though this sleeve is relatively small according to the latest factsheet, which reported that equities made up 3.6% of assets at the end of April.
Jason Hollands, managing director at Bestinvest, pointed out that unlike other properties funds which have already resumed dealing, ‘the stack of investors seeking an exit was already building months ahead of the Covid-19 crisis’, though he thinks the rush will now slow.
‘No doubt M&G have been engaging with sizeable investors in the fund for some time, to estimate the scale of likely withdrawals and create sufficient liquidity to meet this demand. The outflows undoubtedly appear very sizeable but you would expect these to come through quite quickly once the fund had reopened, given the prolonged period which investors have had to wait,’ he said.
Hollands added that the initial gating was in part due to the strategy’s high exposure to bricks-and-mortar retail – a sector already struggling in 2019 before the pandemic, which has further accelerated the shift away from the high street towards online shopping.
Upton has attempted to address that through the mix of properties which the fund has sold or exchanged on. Nearly 39% of the disposals were categorised as retail in the reopening announcement on 20 April, with exposure to the sector falling from 38% to 28% and the portfolio now weighted more to industrials. Although, office holdings remain prominent, including the top holding, 1-8 Bedfont Lakes near Heathrow.
The M&G fund was one of the last in the direct real estate sector to resume dealing. Aegon’s Property Income fund is one peer which remains closed, while Aviva has decided to wind up its own fund and the associated feeder fund.
From September when real estate funds started to reopen until the end of April, about £822m has flowed out of the UK Direct Property sector, according to Investment Association data.
‘Add in the backdrop where there are real questions over the future of parts of the retail and office markets and the challenges for the large, generic property funds are clear to see and that’s before we even consider the ongoing Financial Conduct Authority (FCA) review into the appropriateness of daily-traded, open-ended property funds,’ said Hughes.
The FCA launched a consultation on the ‘liqudity mismatch’ between open ended funds’ structure and the illiquid nature of property last August – suggesting the implementation of notice periods of up to six months for withdrawals – but last month delayed any decision until at least the third quarter.