Investors Withdraw £30.8 Million In A Day From Second Property Fund

Following M&G’s ‘gating’ of its £2.5 billion Property Portfolio fund last week after it encountered liquidity problems as a result of a spate of withdrawals, £30.8 million was withdrawn from a rival fund over just one day last Friday. Investors in the Aberdeen UK Property fund were clearly rattled by the prospect of also finding their capital locked in until further notice, leading to Friday’s stampede towards the exit.

The data comes from Morningstar, the capital markets and funds data group that monitors capital flows in and out of funds. The Aberdeen UK Property fund, managed by Standard Life Aberdeen, also saw £30.8 million of net outflows on Wednesday December 4^th. However, Thursday saw a net withdrawal of just £480,000.

The Aberdeen fund was earmarked as potentially vulnerable to a suspension of trading and withdrawals after M&G moved to freeze its Property Portfolio fund. Investors in the second fund, both institutional and retail, moved to head off the prospect of their money being potentially locked in for months were the same fate to unfold.

M&G suspended trading in its main property fund with the approval of the FCA. The move was justified as one that protected investors that wanted to remain loyal to the fund. When too many redemptions are made over a short period of time from funds that are invested in illiquid assets, such as property, the fund’s management can be forced into selling of assets to raise the cash. If that has to be done speedily, the fund can have to lower prices to attract a buyer quickly, leading to remaining investors losing out.

Aberdeen UK Property, a £1.3 billion fund, is invested in real estate assets that include retail premises, including Edinburgh’s Hermiston Gait retail park and Sheffield’s ‘The Moor’ shopping centre. J Sainsbury and B&Q are among its high profile tenants. Retail property assets are considered vulnerable in the current economic climate as an increasingly larger share of retail moves online to the cost of traditional bricks-and-mortar shopping.

Over the past few years, a string of major retail chains including Debenhams, Mothercare, Monsoon and the Arcadia Group of brands, have either entered Company Voluntary Arrangements (CVAs) with landlords. Others have requested rent reductions on the premise that if not granted they could be forced into a CVA as result.

Over the past 2 years it is estimated that around 7500 retail units have fallen empty. 49.5% of the Aberdeen fund’s assets are in retail property, including warehouses. Warehouses, however, are actually seeing an increase in demand as the rise in online shopping fuels the need for storage and fulfilment centres.

The Aberdeen UK Property fund is not the only peer of M&G’s Property Portfolio to suffer a run last week. £4.6 million was also pulled from the smaller Janus Henderson UK Property fund on Friday. It has total assets of £536 million. The Morningstar data is preliminary and subject to revision.

As of last week, Standard Life Aberdeen had, it said, 14.6% of its assets in cash at the end of November. That adds up to around £190 million, meaning that it should, for now, be able to cover the flow of redemptions. However, should they continue that could change. Morningstar data shows £542 million was withdrawn from the Aberdeen fund over the first 9 months of the year.

How much of their assets is kept in cash to cover redemptions is a delicate balancing act for funds invested in illiquid assets. They need to keep enough cash to hand to avoid having to suspend trading and lock investors in if outflows significantly increase. However, that cash is not ‘put to work’ earning a return, which has an inevitable impact on a fund’s performance.

It’s the second time in short period of time that UK property funds have been hit by a run of redemptions. Following the shock Brexit referendum result a number of major property funds, including the M&G and Aberdeen funds, were also forced to lock in investors for a period.

The Woodford Equity Income fund was also recently frozen, and subsequently shut down. That, however, was a different scenario with the company heavily invested in illiquid shares in private companies. Equity funds are only supposed to have a minority of their capital tied up in private companies whose shares are not traded on a stock exchange. The Woodford fund bent the rules by encouraging many of the companies it invested in to list on the Guernsey stock exchange.

This allowed it to meet minimum requirement on exchange traded assets. But with low liquidity on the Guernsey exchange, the fund was still unable to quickly enough cash in holdings to pay out investor redemptions.