The really bad news yesterday for many investors was that the £2.5 billion M&G Property Portfolio Fund had been closed to redemptions. This is of course an open-ended fund where sales of units by investors causes the manager to sell some investments to realise cash to meet those redemptions. The fund holds a number of large retail shopping centres in the portfolio which must be particularly difficult to sell at the present time. The fund has seen withdrawals of over £1 billion in the last year and the fund has recently seen “unusually high and sustained outflows”.
Is this another Woodford Equity Income Fund case where investors are going to be locked in for many months and unable to sell their holdings and ultimately lead to a wind-up or substantial write-down of their investments? The simple answer is quite possibly but there is little they can do about it.
The announcement seemed to have a negative impact on many property shares and trusts even those that are not invested in retail assets. The message that investors should learn from this is that holding illiquid investments in open-funded funds is positively dangerous. The FCA did announce new rules in September to ensure investors were warned about the risks of closure in such funds. But to my mind the simple solution should be to ban such funds altogether. If platforms list such funds, then some fools will buy them regardless of warnings.
This not just relates to property funds, where direct holdings of property are always going to be illiquid because selling buildings always takes time, but holdings of unlisted shares which was another problem that Woodford faced. Even big holdings of small cap listed companies can be difficult to shift rapidly. The realisation by investors in the M&G fund that such funds were positively dangerous might of course have contributed to the large redemptions in the last year.
Another item of bad news yesterday was for holders of shares in M&C Saatchi (SAA), the advertising agency. The share price fell by almost 50% on the day, after the company issued a statement on an “Accounting Review and Trading Update”. It seems that the announcement back in August of “accounting issues” has turned into worse news than expected, increasing the total adjustments required to £11.6 million (pre-tax). There will also be a bill of £1 million for the associated accounting and legal work.
Trading is more bad news. The company says “Underlying profit before tax, before exceptional costs, is expected to be significantly below the levels expected at the time of the Company’s interim results due to weaker than expected trading in the final quarter of the year and higher than expected central costs”. In addition there will be a restructuring of the UK office which will cost an extra £2.5 million in exceptional charges.
Part of the problem here is that the advertising world is changing. Much expenditure is moving to social media such as Google Adwords, Twitter and Facebook where creativity is possibly less important. The M&C Saatchi business model seemed to be to take over or build small teams who ran their own accounting system. The company had lots of different local systems which is only now being merged into a common Oracle cloud-based system. The company also announced a change of auditors to PwC.
As I have said before, and in my book, accounts are not to be trusted and what one needs to look at is the business model and their operational systems. In Saatchi the former was vulnerable to market change and the latter were clearly of poor quality.
Can this company recover to its former glory? Perhaps, because it claims it will have net cash of £5 million at the end of December. But looking at the last interim results in June indicates a current ratio of only 1.06. Revenue, and cash seem to be falling so this business seems to be subject to rapid changes. Predicting the outcome is not likely to be easy. One for speculators, or only those who have some very deep and current knowledge of the business would be my conclusion.
The author has no financial interest in any of the investments mentioned.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )