Interactive Investor

Jeff Prestridge: this is the only place for illiquid assets

Our columnist has a top tip for the regulator to stop investor cash becoming trapped in a sell-off. 

7th April 2021 09:20

by Jeff Prestridge from interactive investor

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Our columnist has a top tip for the regulator to stop investor cash becoming trapped in a sell-off.

jeff prestridge

A lot has happened to the world since investment house M&G (LSE:MNG) announced in late 2019 that it was suspending dealings in M&G Property Portfolio (B8G9TT8) – its fund that invests in commercial property (offices, industrial buildings and retail outlets) and usually pays investors an attractive income from the rent it receives from tenants.

[Reader, please now take a deep breath]. We’ve had a General Election (well done Boris), the UK has left the European Union (still a divisive decision to this day) and, of course, coronavirus has struck like a deadly rattlesnake – taking far too many good lives with it and causing untold economic damage along the way. 

The United States has even managed to land a ‘rover’ – called Perseverance – on Mars (why, oh why you may ask?), while in the investment world, stock markets have resembled a ride on Blackpool’s Big Dipper (if it were open), plunging one moment and then rising the next. A spectacular rollercoaster ride which I am sure is not over as we splutter out of lockdown and desperately try and avoid a third wave of coronavirus.

Yet for those invested in M&G’s £2 billion commercial property fund, nothing has changed as far as their investments are concerned. Frustratingly, they’re still trapped, unable to access their money. The fund remains closed, although it has continued to pay investors a modest quarterly income – an offering which has probably prevented widespread investor frustration boiling over into outright rebellion. 

What started as a ‘temporary suspension’ (the words M&G used in its letter to investors in early December 2019) is now described in monthly updates as a continued suspension.

It’s not the first time the door has been shut on this fund. In the wake of the Referendum vote in July 2016, dealings were suspended for four months. And, in its defence, it is not the only commercial property fund to have had to take such drastic action. But M&G’s current suspension has gone on far longer than most rivals - and with each passing day the fund remains closed, it is obvious that something isn’t quite right. Not with M&G I hasten to add (although it hasn’t covered itself in glory over the way it has handled the fund’s suspension) but with the way the fund is set up -  and many property funds like it. 

The problem with property funds

To cut to the chase, it’s an ‘open ended’ investment fund with money flowing in and out according to investor sentiment. So, when plenty of cash is coming in from new investors, everything works smoothly - the fund manager can use the fresh money to invest in new properties. 

But when lots of investors want out of the fund – as they did in July 2016 and late 2019 – the wheels can come off quite spectacularly because the manager is just not able to offload properties quickly enough to raise the cash to pay them (it takes a mighty long time to sell an office block). The fund’s suspension usually follows.

It’s exactly what happened to open-ended investment fund Woodford Equity Income in June 2019 when a big institutional investor (Kent County Council) wanted to redeem its holding. The fund couldn’t meet its request because the portfolio was heavily invested in illiquid assets (unquoted stocks as opposed to commercial property) and so was forced to suspend dealings.

Of course, unlike Woodford Equity Income, which has since been dismembered (apart from an awkward illiquid rump of unquoted assets), M&G Property Portfolio will live to fight another day. 

Indeed, in its latest missive to investors last month, it said it was confident that the fund would reopen by the end of June. A move made possible by the disposal of properties worth £541 million, freeing up cash to pay those wanting out. Yet it is not a satisfactory state of affairs. Investors should not have to go through months of such investment torture.

This is how we make it right 

Is there a solution? An alternative? Yes, there is. There are a number of commercial property trusts that are set up in a different way to M&G Property Portfolio that allow investors to trade their holdings whenever they wish. This is because they are structured as stock market listed investment trusts (closed ended funds) with investors holding shares in them. 

So, when lots of investors want out as they did in July 2016 and late 2019, the managers of these trusts don’t have to sell properties – or suspend dealings. Instead, the value of investors’ shares adjust (fall) to reflect the crumbling value of the underlying assets and the fact that investors want to offload them. The price that sellers get for their shares will not be particularly attractive, but at least they can get out and move on. They’re not trapped.

Going back to the Woodford saga (sorry, readers), sister fund Woodford Patient Capital traded throughout the trauma of Woodford Equity Income – primarily because it was a stock market listed investment trust. It’s still going today, albeit under a different label (Schroder UK Public Private Trust (LSE:SUPP)) and at a share price of around 39p – a shadow of its £1 launch price in early 2015. Shareholders may have been left battered and bruised by the whole experience, but they have never been prevented from disposing of their holdings.

The regulator is currently scratching its navel over what to do to protect investors who hold open-ended funds with exposure to illiquid assets. There is talk of a new investment vehicle – the long-term asset fund (LTAF) – that will offer investors access to income-producing illiquid assets, but without the promise of daily dealing.

I’m not sure that is the right way forward. My view is that illiquid assets shouldn’t sit inside an open-ended fund – whether it’s a unit trust or LTAF. Their rightful home is inside an investment trust.

The sooner the regulator understands that, the sooner we can eradicate sudden investment fund suspensions that do nothing but cause widespread investor detriment – and the investment industry permanent (not temporary) reputational damage.

And while I’m on the subject of lockdowns, roll on April 12. Enjoy – I’m getting my hair cut.

Jeff Prestridge is personal finance editor of the Mail on Sunday. He is a freelance contributor and not a direct employee of interactive investor.

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