Fund house M&G has extended the suspension of its stricken £2.3bn Property Portfolio fund, despite raising £70m from asset sales.
Dealing in the fund was first suspended on December 3 due to a wave of redemptions, with investors unable to access their cash.
The fund house cited political and economic uncertainty in the UK leading to increased demand from investors for their cash back as the reason for the original suspension. Investors had withdrawn about £1bn from the fund in the year prior to the suspension.
In its update to investors in the Property Portfolio fund yesterday (January 28), M&G stated it has decided to extend the period of the fund’s suspension “to best protect the interests of investors.”
The fund managers will continue to try to sell assets, having raised £70.4m of cash since December.
A further £172.2m of assets are in the process of being sold, being either at the under offer stage or the with solicitors stage, the company stated.
M&G will continue to waive 30 per cent of the fund’s charges during the period of suspension. As 30 per cent is the typical margin a fund house makes on fees, it is likely that M&G is running the fund at cost price, or close to it right now.
Open-ended property funds are particularly vulnerable to a spike in outflows as the assets they own, physical properties, take time to sell.
These funds typically retain a significant slug of the the assets in cash, in order to meet the normal level of redemptions.
But as cash usually returns less than property, this acts as a drag on returns. The cash level on the M&G fund had dwindled to 4 per cent at the time of its suspension. The fund lost 7.6 per cent in performance terms in 2019.
FTAdviser has previously reported that many fund houses charge an annual management fee on the cash holding, generating millions in income for the fund houses.
Ryan Hughes, head of active portfolios at AJ Bell, said: “With cash in the fund at just under 5 per cent at the end of December and a further 7 per cent of the fund currently under offer, the portfolio managers will want levels to be much higher before they are in a position to re-open.
"They will be very conscious to ensure there is a sufficient cash buffer following the re-opening, as the last thing they want is for the fund to have to suspend again if redemptions accelerate."
He added: “With this update coming out at the same time as Woodford investors being told about their first payment, it reminds people of the dangers of having illiquid assets in daily traded funds.
"While other major property funds have avoided succumbing to a similar fate, investors need to understand the liquidity risk they are taking when investing in assets that are hard to sell in challenged markets.”