M&G Property fund and Prudential UK Property fund: What does their suspension mean for our portfolios?
Story published Dec 7 2019
Readers may have heard that two funds that invest in British commercial property have been forced to suspend dealing in recent days. M&G Property and Prudential UK Property have both said that no one can invest in these funds for the time being and, of more concern, those who currently have money in the funds cannot withdraw it.
Property funds keep some money in cash to meet day-to-day withdrawal requests but if a lot of investors want to sell their holdings at the same time the cash “buffer” can be exhausted. In this case, the fund can raise money to repay investors only by selling some of its assets.
When those assets are commercial buildings such as offices and shopping centres, selling them naturally takes time. Until sufficient sales are made, the fund cannot meet redemption requests and therefore has to remain suspended.
But none of this applies to the property funds that feature in our three portfolios.
The property funds that have been suspended, M&G Property and Prudential UK Property, are what are known as “open-ended” funds, whereas ours are “closed-ended” funds, also known as investment trusts.
When an investor in an open-ended fund wants his or her money back, they have to ask the fund for it directly. The fund then pays them from its cash “buffer” or by selling assets as described above.
But this is not the case with investment trusts.
Investors’ money cannot be withdrawn directly from an investment trust (except in certain special circumstances that are not relevant here). Holdings in investment trusts come in the form of shares, so when someone wants to sell their holding they have to sell those shares on the stock market.
Because a new buyer has to be found, there is no need for the fund itself to be involved: it does not have to use its cash, or sell any assets, to pay back the investor.
There will always be a buyer for any shares that an investment trust holder wants to sell – that is the nature of the stock market.
In summary, the two types of fund work in a completely different way when it comes to withdrawals. We deliberately chose investment trusts rather than open-ended funds for our portfolios’ exposure to property for this reason.
We must add, however, that our property funds could still be affected to some extent by what has happened to the M&G and Prudential property funds. The suspension of those two funds could well affect investors’ sentiment towards property as a whole and this could result in the share prices of the property funds in our portfolios being driven lower.
Also, if open-ended property funds sell some of their holdings quickly so that they can meet investors’ withdrawal requests, similar properties held by our funds may have their prices marked down in their accounts, which could also cause the market to push their share prices lower.
Our advice to anyone who holds the property funds in our portfolios, however, is to do nothing. The closure of the M&G and Prudential property funds has no effect on the income that our property investment trusts will receive or on the dividends they will pay to investors.
Investing your pension is a very long-term business. In time the suspended property funds will no doubt reopen and we can expect any short-term effect on the share prices of our property investment trusts, or on the value of their assets, to pass.
If you have any questions please feel free to email us.
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