Legal & General Unit Trust Managers is overhauling the investment strategy of its L&G UK Property fund. Most of the £1.2bn fund is currently invested directly in UK property but L&G plans to move almost half the portfolio into global real estate investment trusts (REITs). The new hybrid strategy will enable the fund to continue offering daily liquidity to its investors.
If shareholders approve the change at a meeting on 10 April, the fund’s new strategic asset allocation will be: 45% UK direct property exposure, 45% global REITs and 10% cash.
The fund currently holds about 20% in cash to meet short-term liquidity requirements but will be able to reduce that buffer because REITs are more liquid.
The move comes as open-ended property funds face criticism about the mismatch between owning illiquid assets but offering daily liquidity. Several funds have closed as a result, including the £545m M&G Property Portfolio.
The Financial Conduct Authority (FCA) is conducting a consultation on daily-dealt property funds and one possible outcome would be requiring funds to instigate three to six month redemption delays.
The consultation is focusing on funds with more than 50% exposure to direct property, so the L&G UK Property fund will fly under the radar after its reshuffle and will still be able to offer daily dealing to shareholders.
Oli Creasey, property research analyst at Quilter Cheviot, supports the changes. “We are encouraged that L&G is proactively seeking to move beyond the FCA’s consultation, which has been a significant headwind to property investment in the UK,” he said.
Quilter prefers L&G’s new hybrid approach because it provides the “best of both worlds,” Creasey said.
“Maintaining a significant weighting to REITs and other property companies mean that the fund will be able to provide genuine liquidity in the vast majority of scenarios, given those shares are frequently traded on stock exchanges,” he explained.
“However, the remaining direct property weighting provides investors with a less volatile investment – REIT shares can, and do, change value considerably day-to-day, and direct property exposure should dampen that effect, and also provide a higher income than REIT dividends.”
L&G’s fund will become the largest hybrid strategy in its sector. “Funds such as Columbia Threadneedle’s Property Growth & Income fund and TIME Investment’s Property Long Income & Growth fund have been operating on a similar basis for some time, but have not built the sort of scale that L&G already has,” Creasey observed. “The fund is currently over £1.2bn in size and will dwarf those longer-standing peers.”
Performance of fund vs sector over 10yrs
Source: FE Analytics
L&G UK Property is managed Michael Barrie and Matt Jarvis. Performance is third quartile over one and three years but second quartile over five years compared to its peers in the IA UK Direct Property sector. Over 10 years the fund is significantly ahead of the sector average, as the chart above shows.