On 4th December 2019, M&G suspended dealing in their £2.5 billion flagship UK Property Fund, after suffering nearly £1 billion of withdrawals in under a year. M&G stated that deteriorating market conditions had significantly impacted their ability to meet fund redemptions and that they plan to keep the suspension in place until they are able to raise enough cash for further withdrawals. This is being done to avoid the fund manager having to try and sell illiquid assets (property) at short notice.
There have now been 3 fund suspensions over the last few months – M&G, Prudential and Invesco Perpetual, due to liquidity concerns for remaining investors.
In recent months, Brexit-related uncertainty and ongoing structural shifts in the UK retail sector have prompted unusually high outflows from funds holding illiquid assets. Funds such as Woodford Equity Income and Prudential UK Property Fund have also suspended trading due to increases in withdrawals and concerns about liquidity of the underlying assets held within. Liquidity risk is something that is considered as part of the due diligence carried out by the Foresight Investment Committee.
Open-ended funds, where investors are able to make investments and withdrawals freely are potentially subject to these risks if withdrawals increase dramatically or investment flows fall. Foresight focusses attention on funds that have taken steps to ensure they remain open to new investors whilst remaining liquid for existing investors. Typical steps would include ensuring they have a spread of smaller individual investors as opposed to larger single holdings, avoiding the potential problem of large single redemptions that cause a strain on the fund. Fund managers who actively manage this risk may even turn away large subscriptions from single investors, particularly if the underlying assets are illiquid, such as property.
It is vital when considering any investments that extensive research is carried with a wide range of risks considered. Foresight’s Investment Committee will continue to monitor all investments to ensure they remain suitable for our clients. If you would like to review any of your investments, please contact Foresight Wealth Strategists.