M&G Latest Asset Manager To Freeze Fund On Liquidity Issues
Following the fall-out of the initial freezing and then decision to shut down the high profile Woodford Equity Income Fund, another fund manager, M&G, has now moved to suspend redemptions from one of its funds. Following an ‘unusually high’ run of ‘sell’ orders from investors in M&G’s Property Portfolio Fund, the asset manager announced it had been left with no option but to temporarily suspend further redemptions, locking the capital of remaining customers into the fund pending further notice.
The move by M&G once again highlights the risks associated with funds invested in illiquid assets and, coming so soon after the Woodford debacle, is a major blow to the open-ended funds sector more generally. It’s also a move that will tarnish M&G’s reputation and gives the FCA, which regulates the financial services sector, a headache.
It’s not the first time that property funds have run into liquidity issues in recent years. A run of investor withdrawals in the immediate aftermath of the Brexit referendum saw Aviva, Henderson Global Investors, Standard Life and, again, M&G’s Property Portfolio Fund all freeze redemptions, locking investors in until further notice.
It highlights a reality that the FCA will come under growing pressure to deal with – open-ended funds promote themselves as offering investors liquidity and the opportunity to cash holdings in within a day whenever they might choose or need to do so. But under the hood, some of these funds are invested in highly illiquid assets, like shares in privately held companies or real estate. These assets can practically take a long time to sell off at a reasonable valuation, months to even years. So when more cash than expected needs to be made available to facilitate sell orders – there’s a problem.
There is clearly a disconnect between what some open-ended funds promise and they reality of what investing in illiquid assets means. The problem has been discussed by regulators since the 2016 stampede out of property funds. However, little in the way of practical action has been taken to address it. When a committee of MPs was set up to investigate the recent Woodford fund mess, Bank of England governor Mark Carney told them open-ended funds invested in illiquid assets were “built on a lie”.
The only genuine step so far taken has been a September proposal of the FCA, which regulates such funds, for a new category of funds to be created – “funds investing in inherently illiquid assets”, or FIIA funds. Such funds would be obliged to provide investors with clear and prominent information on the liquidity risks that they entail and the circumstances under which redemptions could see redemptions restricted.
Another proposal is for such funds to be redesigned with, for example, redemptions being offered on a monthly rather than daily basis. However, that will do little to help to the hundreds of thousands of smaller investors that have already been attracted into illiquid property funds as a result of their often attractive yields. Many of those might, with some justification, argue that these funds did not do enough to also inform them of the risks.
There will now be concerns that other property funds will follow M&G’s decision and also temporarily shutter withdrawals. When that happens there is always the risk, as happened with the Woodford Fund, that it becomes clear assets cannot be sold off quickly enough for the funds to be reopened within a reasonable period of time – leading to winding up action. When that happens assets are sold off to refund investors, almost certainly at a significant loss.
For most private investors, same-day withdrawals are not actually a crucial quality of funds. Or at least not all of the funds they invest in. They are usually invested for the long term. The problem arises when highly-geared larger investors need higher levels of liquidity. Unfortunately, when they move for the exit door en-masse, it is smaller investors, then left locked into funds indefinitely, that can suffer.
Some funds keep large cash holdings to guard against withdrawals leading to liquidity problems. But that’s also not a good solution as investors’ capital is then not put to work, impacting the long term returns potential of a fund. That all adds up to the obvious need for either a re-design or re-branding of funds invested in illiquid assets, if they are to properly serve the needs of a range of investor profiles.
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