Along with many other fund groups, we decided this week that it was in the best interests of all investors to temporarily suspend dealing in the M&G Property Portfolio, a £4.4 billion fund which invests directly in a broad range of retail shopping malls, warehouses, industrial plant and offices.
This was not a decision we took lightly. No fund manager wants to tell its customers that they cannot withdraw their money. So we want to explain why we think the decision to suspend trading in our fund is in the best interests of the many thousands of people who have entrusted us with their long-term savings.
Commercial property has many merits as an investment. The fund receives rents from the businesses occupying its warehouses, offices and shops, providing an attractive level of income, certainly when compared with the interest rates on bank or building society deposit accounts. The income is dependable too: the average commercial lease in our fund has more than nine years to run. As well as rental income, as the economy grows and demand for property increases, the capital value of the buildings can also rise over time.
The drawback of property is that it is not liquid. Unlike shares, which are easily priced and which can be sold in a matter of minutes, it typically takes three months to buy or sell a building. And that is in normal circumstances. The market uncertainty that has resulted from the outcome of June’s referendum on the European Union has made it especially difficult to value properties and to match buyers with sellers.
So what do we do when our customers want their money back straightaway, as is their right as an investor in a daily dealing mutual fund? Well, despite the market turmoil of the past few days, there are people willing to take a longer term view and buy commercial properties now. But given the current market conditions, would-be buyers want a deep discount to the asking price.
That’s a dilemma for fund managers. Do we sell our properties at a price far lower than we think the buildings are truly worth over the longer term to meet redemptions today and tomorrow? If we do, then we create an immediate loss for the fund’s investors. Or do we tell investors they cannot redeem for a while, and hold onto the properties until we can achieve a selling price which we believe reflects a truer long-term value of the asset?
Although this should not be taken as investment advice, we believe commercial property is a long-term business – it is a type of investment which requires a five-year view or longer. Selling assets at a heavy loss because of what is likely to be short-term market disruption does not make good investment sense. That’s why we believe that suspension is in the best interests of all the fund’s shareholders, because it protects the value of their investments.
At some point, conditions in the real estate market should return to normality. In the meantime, suspension enables us to build up cash by selling offices, warehouses and shops in a controlled manner. Rather than being forced to complete a poor deal in days, we can take our time and negotiate a better deal on behalf of our customers. We will obviously continue to manage the properties to the best of our ability.
Nor does our fund borrow to buy properties, so with no debt to service and no bankers hammering at our doors, we are not under any immediate pressure to agree to sales which might harm our customers’ interests. We are in a good position to be patient and patience, as in most walks of life, is a virtue in investment.
Denying investors access to their money is a difficult decision to make. But in these exceptional circumstances, we believe this is the best way to preserve value for our customers. When the political turmoil subsides and confidence returns, we believe our investors will be well-placed to benefit from any rise in property values.
Issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776.