News has come in that one of the UK’s largest fund managers is suspending its Property Portfolio for the second time in four years. Whilst M&G is one of the UK’s best-known managers and the asset class is perennially popular with Retail Investors, one surely must question why we are back here again.
The Financial Times (see below) comments on the fund’s relatively poor performance and a haul for M&G of some £100million in gross fees (quite apart from something like £70million in running costs) since the June 2016 Brexit vote. M&G have stated they’ll be reducing fees during the suspension period. However, the fact remains, investors pulling out more cash than the manager has available has caused the second gating of the fund in recent years.
Property funds are expensive things to run – valuation and maintenance costs are two examples of the higher costs that property managers face – so performance of a behemoth such as the M&G fund that peaked at £4.4billion in 2016, the year of its last suspension, can be less sparkling than other vehicles.
The right tool for the job
As any handyman will tell you, using the wrong tool for the job can give slow progress, produce a poor result and even be dangerous. Using the wrong investment vehicle can also produce similar results, potentially causing financial hardship, market contagion and fire sales which are unattractive and unappealing to everyone except the lucky asset buyers.
It is about time that other vehicles or trading intervals were considered the norm for collective property investment – the FCA’s review and new rules which were adopted after the last spate of property fund suspensions just a couple of years ago, were perhaps a good time for sweeping changes within the UK’s funds sector. However, the industry and its regulator still seem comfortable with structures which some may feel are clearly inappropriate.
Not all black and white
Looking at alternative structures such as exchange-traded funds (ETFs) or investment trusts (ITs), which hold UK property shares, could be a solution but they may tend to show vulnerability when market sentiment is generally poor. Funds such as the M&G Property Portfolio do provide valuable negative correlation to equity and bond markets. ETFs and ITs may also not reflect the inherent benefits of property as an asset class – they often focus upon property company shares, remember, not necessarily the underlying bricks and mortar which can create significant wealth in the right market conditions.
The writer of this article does have significant insight of how a well-designed property fund can weather the contagion caused by other funds suspending – but the fund in question was never daily-traded, had beneficial structural attributes and a manager with a clear and topical liquidity policy. Investors knew from outset how long it would take for redemptions to be transacted and therefore their expectations were clearly and successfully managed.
Questions about M&G’s specific performance and fees are not for this article – our comment is more about the suitability of structures for certain investor classes. We are also wondering whether these investors themselves should not be expecting real estate to provide the kind of liquidity that daily-traded assets such as equities and bonds usually can. Perhaps the fault lies in the investors and/or their advisers being wedded to unrealistic liquidity policies.
Whatever the problem, it is about time a solution was found and future property investors can have their expectations, and their money, properly managed.