By Julie Steinberg
LONDON -- Fund management giant M&G PLC on Wednesday blocked investors from cashing out of a GBP2.5 billion ($3.3 billion) property fund, as a wave of pain among retailer tenants hammered the fund's holdings.
The firm said it was temporarily suspending trading in its Property Portfolio commercial real-estate fund, the U.K.'s largest. It said "unusually high and sustained outflows" from shareholders exceeded the fund's ability to liquidate its real-estate holdings fast enough.
The decision harks back to the months after the U.K. voted to leave the European Union in 2016, when a wave of asset managers "gated" -- or halted redemption in -- their property funds after investors tried to cash out quickly. The funds later resumed trading, but the suspensions highlighted the dangers to investors of funds that offer daily buying and selling of shares backed by hard-to-sell assets like property.
M&G's property fund, which is backed by individual investors, holds 91 U.K. commercial properties across retail, industrial and office sectors, according to its latest filings. More than a third of its properties are in the hard-hit retail sectors, where department stores and other shops have reeled in the face of online commerce and changing consumer tastes.
The fund's property assets are typically valued by an outside firm once a month, but the declining value of retail sector assets prompted an unusual midmonth revaluation on Nov. 8, knocking 3.6% off the stated value of the fund. The fund cited a "marked deterioration in the retail sector" with falling rents and dropping valuations on retail property transactions.
As of the end of October, the M&G fund had just under 5% as of its assets in cash or near cash, according to a fund fact sheet. That was down from more than 7% at the end of September.
As of its official filings in March, the fund's roster of tenants included department-store chain Debenhams, which earlier this year entered administration, akin to U.S. bankruptcy procedure. The chain has sought to close stores dozens of stores and cancel leases.
The suspension is an early setback for M&G, which spun off from former parent insurance company Prudential PLC in October. M&G is a well-known investment brand in the U.K. and manages more than GBP341 billion in assets. Shares of M&G traded down 2.7% on Wednesday.
M&G said it had notified the Financial Conduct Authority, the U.K. regulator. A spokesperson for the FCA said it was working closely with M&G and that the suspension was undertaken to "allow the fund time to raise liquidity levels and preserve value for investors through orderly asset sales." The FCA in 2017 warned of the risks associated with investing in funds that contain underlying illiquid assets.
Earlier this year, Neil Woodford, one of the U.K.'s best-known money managers, suspended redemptions from his main fund to avoid forced selling of stakes in companies to meet investor requests for their money after poor performance. During the same period, research firm Morningstar Inc. suspended its rating on a fund run by French bank Natixis SA's H2O Asset Management arm over liquidity concerns.
Other U.K. asset managers are preparing for potential redemptions. Aviva Investors, which also gated its U.K. property fund in 2016, sold properties over the summer this year to build up a cash buffer, a spokesman said. Its cash levels now total 30% of the Aviva Investors Property Fund's assets under management, he added.
"We are in a period of heightened market uncertainty and believe this is an appropriate level given market conditions," the spokesman said.
Write to Julie Steinberg at email@example.com