M&G has only now, 20 months after dealing in the fund was suspended, agreed to stop charging the management fee on cash, and has cut the management fee on the property assets by 30 per cent for the duration of the time until it actually closes.
Yearsley says these outcomes demonstrate that open-ended funds are not suitable vehicles in which to own physical property.
Simon King, chief investment officer at Vermeer Partners, says he avoids investing in open-ended property funds “like the plague” due to the liquidity issues highlighted above.
He also says it was wrong of M&G to continue to charge a management fee on the fund between now and whenever it closes, but M&G says it will have to manage the portfolio until then.
Benjamin Benson is head of investment research at national advice firm AFH, which actually runs an open-ended property fund.
The fund is only available to clients who are advised by AFH, and Benson says this means the liquidity impacts are mitigated, because AFH can manage the level of exposure each client has to property themselves, because the money is only managed for their own advised clients.
His reason for believing the best way to develop clients' exposure to physical property is via an open-ended fund is that he feels gaining the exposure via investment trusts or directly via property shares are not getting the diversification away from equities, which he feels is the point of having property in a portfolio.
Benson says: “We still think property is a great building block for portfolio construction, particularly direct. In the short term, listed property does not provide the diversification that an alternative asset class should.
"Equity beta and correlation mean it behaves much more like risk assets, where a directly invested fund provides stability, and more property-like behaviour.”
This apparent correlation with equities happens when, for example, an investment trust is part of an index such as the FTSE 250, and when investors who own the FTSE 250 tracker fund sell it, the tracker then has to sell some of the property investment trust shares it owns, and that may push down the share price.
That means, despite the investment trust owning property, that slug of a client’s portfolio is vulnerable to movements in equity markets, and not diversified away from this.
Risk weighted?
King only allocates to listed property funds on liquidity grounds, but says: “We have most of our limited property exposure via investment trusts, which has been painful due to the level of discounts they currently trade at.
