Welcome to Market Flash – a communication authored by Arbuthnot Latham’s Co-Chief Investment Officers designed to give you time sensitive information regarding material events which impact markets around the world. We hope you find this message of value and would welcome your feedback.

Arbuthnot Latham has held the M&G Property Portfolio Fund over the past couple of years. In July 2019, the bank sold the fund over concerns regarding its liquidity and the overall UK retail property outlook. On Wednesday, M&G announced it would suspend dealing in this fund.

Q: What is the M&G Property Portfolio Fund?

A: The M&G Property Portfolio Fund is an investment into a portfolio of commercial properties predominantly in the UK.

Q: What happened with the M&G Property Portfolio Fund?

A: On Wednesday, 4th December 2019, the M&G Property Portfolio and M&G Feeder of Property Portfolio funds, representing £4.49 billion of assets stopped accepting buy or sell instructions.

Q: Why did M&G take this action?

A: In recent years, many retailers with a high street focus have struggled to compete with those with a strong online presence. Within the last 12 months alone, household names such as Debenhams, LK Bennett, Mothercare, Karen Millen and Links of London have found themselves in financial difficulty and falling into administration.

As more retailers move into administration, the sector’s wiliness and capacity to pay rent diminishes. This in turn affects the value of the properties themselves.

The M&G Property Portfolio and M&G Feeder of Property Portfolio fund’s allocation to the retail sector are higher than their peers, typically by around 40%. As such, the funds have borne the brunt of the fall in retail property values.

Seeing the fund decline, as well as an uncertain political future, investors decided to redeem their investment. Herein lies the problem. Some investors were able to obtain their cash back from the fund in three days, whereas we all know selling a building takes much longer than that. There is a mismatch between the liquidity wanted by investors and the liquidity offered by the properties.

This resulted in M&G fund managers not being able to sell properties at prices they deem acceptable and certainly not fast enough to meet the withdrawal requests. The only logical action left available for the fund managers was to stop investors withdrawing from the fund. This will give the investment team at M&G breathing room to sell more properties within the fund, so that when they allow sales to be made, they can provide the cash requested.

Q: Did Arbuthnot invest into the funds?

A: Over the last couple of years, we held the M&G Property Portfolio and M&G Feeder of Property Portfolio funds in some of our portfolios. The funds performed in line with our expectations.

However, in the last quarter of 2018, the Investment Committee became concerned with funds that had  an exposure to retail property.

At the turn of the year, we decided to switch share classes within the fund. We moved from a cheaper share class that requires three months for cash to be returned, to a slightly more expensive share class that only takes three days for our cash to be returned. This provided us with more flexibility if we decided to exit.

After researching alternative options and analysing the future prospects of UK retail property as an asset class, we decided to sell the funds from all our portfolios in July. We subsequently reinvested into a fund managed by Kames Capital.

Q: Why did you pick Kames Capital?

A: The fund has a low allocation to retail and industrial properties, and a higher allocation to offices. The fund also allocates to smaller buildings, typically worth between £3m-£20m. This means that if the fund needs to meet investors’ redemption requests they would be better equipped. The average property size of the M&G funds is around £27m.

Q: Since the change of fund how has the Kames Capital Property Income fund performed?

A: Since our entry in July, Kames Capital Property Income has outperformed the M&G Property Portfolio and M&G Feeder of Property Portfolio funds by approximately 6.1 %.

Q: Will the Kames Property Income fund be affected by the M&G news?

A: We believe the Kames Property Income fund will not be been affected in the same way as the M&G funds. In our view, Kames’ allocation to much lower levels of retailers is better suited to current market conditions.

Kames have also been able to maintain a higher level of cash within their fund. Our expectation is that they will be able to meet investor redemption demands. In addition, they have no exposure to the following: House of Fraser, Debenhams, Homebase, Carpetright or Mothercare.

Q: When will the funds be able to honour sale requests?

A: M&G have said  they are unable to say how long the funds will be suspended for, but will formally review the suspension on a monthly basis.

Q: Are we making changes to portfolios on the heels of the M&G suspension? 

A: We are in regular dialog with managers of our property investments, monitoring their liquidity, asset base as well as the rate of their redemptions. At present we are comfortable with our allocation and  are not making any fund or asset allocation changes.

Over the long term, our view is that property remains an attractive asset class. However, we believe global properties offer more attractive returns than the current UK market.

The value of investments will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

This information contained above is not investment advice.

Gregory Perdon
Co-Chief Investment Officer
Arbuthnot Latham & Co., Limited

Eren Osman
Co-Chief Investment Officer
Arbuthnot Latham & Co., Limited