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Investors in one of Britain's most popular unit trusts, New Star's International Property Fund, risk losing their tax-free Isa status when it closed its doors to withdrawals this week.
The fund banned investors from taking their cash out after it admitted it no longer had sufficient cash reserves to meet a wave of redemptions. The fund invests in commercial property around the world, particularly the far east and Australia. It usually holds a cash buffer to meet day-to-day demands from investors wanting to buy and sell, but this has dried up as investors have pulled out.
The fund will now have little choice but to sell some of its buildings, raising fears of a "fire sale" of assets that will further depress its value. However the fund manager, Stuart Webster, said: "There are not going to be any quick sales for the sake of it. This is a good fund which is going to see good returns."
The fund will remain suspended until it is able to replenish its cash reserves, which could take some time. New Star declined to put a date on when it might happen, but no one is predicting it will re-open before Christmas.
The initial suspension is for 28 days, but the company will consult the fund's trustees, Royal Bank of Scotland, and the Financial Services Authority to extend the suspension.
Once the suspension runs over 28 days, it poses significant worries for investors who hold the fund in an Isa. Isa rules require that a fund must offer redemption at least twice monthly if it is to remain eligible for tax-free status. New Star says: "We are seeking urgent clarification from the FSA and HM Revenue & Customs on this point and the outcome of these discussions will be communicated as soon as it is known."
The fund was launched in June 2007, promising a "world of new investment opportunities".
But along with other property funds it has suffered from the worldwide downturn in commercial property, which started first in London and New York and has now spread across the globe.
New Star launched in 2000, hiring a galaxy of industry talent. But in recent years many of its funds have markedly underperformed, and last month its co-investment director Stephen Whittaker stepped down.
New Star's investors can call 0845 608 8704 for more information on their fund.
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