Every so often, investors get cold feet on commercial property and rush to the door. A sharp exit from an illiquid sector causes headaches for property managers and all too often, the shutters are put up on the exit door meaning the fund is protected from a fire sale of its assets.
Well that’s the argument put forward by the asset managers.
Recently, M&G who are the investment managers for the Prudential announced it was giving up on “property funds”.
One of Britain’s biggest money managers has shuttered its £565m UK property fund after a wave of investors pulled their cash out.
M&G, a FTSE 100 investment manager, said on Thursday that it had suspended trading in M&G Property Portfolio and will gradually sell off its remaining assets.
The company said: “Once a popular type of vehicle for UK retail investors to access real estate, the IA UK Direct Property sector has seen persistent outflows over several years.
“As the fund has continued to decrease in size, it has reduced the manager’s long-term ability to maintain a diversified portfolio without incurring high, on-going transaction costs …”
The problem is not the asset (commercial property), but the way it is offered to UK investors. Edi Truell, who knows more than most about how to buy and sell assets has an opinion on this.
The discussion over whether to use “open or closed” funds is little understood and little discussed. That may be because closed vehicles- where only a certain number of shares are issued are regarded as too dangerous for retail investors. There are certainly risks associated with these vehicles – which trade on stock exchanges – they cannot be directly held by investors in workplace pensions on insurance platforms.
But they do not get gated, they are transparent in their pricing, what you pay for a share is what the market is willing to offer, what you sell at – is a market price. There may be considerable short-term volatility in an investment trust which borrows to get itself to scale but that is why investment trusts are considered long-term assets.
They may be bothersome for insurance platforms who want all prices to be reported through the insurer’s valuation mechanism but that is not reason enough for intermediation. We are in danger of making convenience the enemy of long-term value.
The insurance industry uses the argument that investors need convenient pricing to ensure that only insurance funds are offered to pension investors. But increasingly, the hegemony of insurance fund platforms is being challenged by master-trustees who want direct access to property, land and the shares of private companies. They are looking to by-pass unit-linked insurance funds and get the direct returns available from direct holding of assets and listed securities,
That is their prerogative as they outgrow the constraints of insurance platforms. Schemes such as Nest and People’s Partnership are now at a scale where they can hold assets with custodians and manage their own liquidity rather than be subject to the dictats of insurer and asset managers.
We will increasingly find that we, the savers , are seeing the intermediaries – the fund and asset managers being by-passed as the investment teams of the people who manage our money find new ways to deliver us our returns.
This is one of the dividends of consolidation and it’s not one that is yet being discussed. That, I fear, is because the conversation with employers and savers is being had by the owners of insurance platforms and not by the likes of Edmund Truell.
On Friday, I wrote about the likelihood of a new investment vehicle being launched by the British Business Bank which will allow the trustees and managers of workplace pensions to access the growth opportunities of early stage companies – by offering them venture capital. It will be interesting to see if this new vehicle will market itself through open-ended funds (LTAFs) or through closed investment trusts.
My hope is that it will be both, but that we see opportunities for more ambitious DC schemes (as well as the DB schemes that already invest in such assets) to access such funds as listed securities.
I am not an an expert in this area and would welcome comments on this blog. It seems to me high-time that we took back control of our money and that the practice of gating which is so pernicious to retail sectors – was properly challenged. We need to think long and hard not just whether to hold illiquid assets , but how to hold them.
The attraction of open ended funds is to fund managers and is that they may grow assets under management through new money subscriptions and with that their income. Closed end such as investment trusts have fixed capital (though of course may borrow). The downside of course is the reputational harm which fund managers may suffer if they deem it necessary to ‘gate’ a fund.
It should be patently obvious that open ended funds which may face withdrawals on demand are an inappropriate vehicle for portfolios of illiquid assets – this is equivalent to a demand deposit run on a bank, but without the back-stop of central bank support.
There is a further aspect to this – valuation or pricing. Many scheme managers seem to consider the lack of price volatility of private illiquid assets a benefit. This arises from the (in)frequency of valuations and their highly subjective nature. Closed end funds with daily quotation are far more volatile – but it may be argued that the observed volatility is the reality. Investment trusts often trade at discounts to their manager declared net asset value – we have seen this with respect to private equity based funds this past year. We have also seen it in spades with respect to the now popular BDC form of credit portfolios. By way of ending, the private segregated investments of DB funds were valued at £81 billion at end 2021 and were also valued at £81 billion at end 2022 – with little or no net movement of funds in or out. I will end with a question – is that really a credible valuation?
Agree Con – we need an update on BDCs! https://henrytapper.com/2023/08/17/what-are-bdcs-and-are-they-the-future-of-private-credit/
On BDCs there is a Robin Wigglesworth article in the FT on October 17th entitled@
“Private credit returns are great (if you believe the marks)
A rolling loan gathers no loss”
Closed-Ended funds in the UK have a legal structure that is more flexible than Open-Ended fund regulations and, in appropriate circumstances, it is possible for a closed-ended fund to effectively operate (trade) like an open-ended fund.
Closed-Ended funds aren’t just a vehicle for illiquid assets – they could play a much wider role in the pensions arena.