Towards the end of last week (Friday 13th as it happens), a swing price was implemented by both M&G and Ignis regarding their UK commercial property funds. The M&G fund fell by -6.25% and the Ignis by -4.97%.
Of course, it is prudent to inform you of such a movement, especially as the sector is deemed to be a relative safe haven, with little correlation to the stock markets.
Just to place matters in perspective, as of the close of business on Wednesday 11th May 2016, the UK commercial property sector had delivered an annual return of +4.76% before charges. The FTSE 100, by comparison, on a price basis had fallen by -12.34%. Over the last six months, the UK commercial property sector has been circa 93% less volatile than the FTSE 100.
The main reason for the swing price being introduced was fears that there could be an avalanche of withdrawals prior to the EU referendum. We were going to lower our holdings in the sector in the next few days but, with the swing price introduced, we would just be banking this short-term loss, which is clearly not what we want. We will, therefore, be retaining our holdings in this sector for the foreseeable future. Following the referendum, we are likely to diversify our holdings into the broader property market with a more global emphasis.
The reality of the situation is that the trigger for this swing price has been caused by relatively small amounts being withdrawn from the UK property sector, which ordinarily would not be an issue. It has been a case of ‘nipping the situation in the bud’ by the fund managers to prevent further outflows.
This is another example of how uncertainty can affect both economically and financially. We are aware that the returns of the property sector have been slowing of late and this has been partly due to a lower yield as a result of higher prices. On saying this, price growth has slowed as investors wait on the side-lines until it is clear whether we will remain in Europe or come out.
I just want to reassure you that the price cannot swing lower again, well at least not until after the swing is reversed. It could be the case that the ‘swing’ does become a more frequent occurrence, hence why we will diversify at a later date.
Below is a statement we received from M&G yesterday. Having also spoken to Ignis, they are of the same view. At the bottom of the M&G statement, they say:-
“Looking ahead, over the next three years, we are forecasting UK commercial property returns of 6% pa, most of which will come from income generated by investing in property. Finally, in an uncertain world, property at the portfolio level has traditionally exhibited attractive diversification benefits”.
The message from us at Blue Sky is to not panic. We expect the higher price to be reinstated in due course, though this may not be until after the European referendum in five weeks’ time.
Bizarrely, this has created an opportunity for those who believe in the benefit of investing in property. Any investment made now may benefit from the reinstatement of the higher price, which may deliver a significant short-term gain. This could be an opportunity for those who have a lot of money in cash.
Apologies if this has created any angst but we are on the case and will advise you accordingly.
Please may I direct you now to the M&G statement below.
Best regards,
Gary Neild
Chair of Blue Sky Investment Committee
M&G Statement
Please be advised that, due to recent outflows from the fund, the pricing basis of the M&G Property Portfolio has swung down by -6.24%. The last time the price swung was in May 2013.
It is important to note that there has been no change to the fund manager’s views on the commercial property market. Fiona Rowley, manager of the M&G Property Portfolio, continues to believe commercial property is entering the maturing phase of the cycle. Going forward, we should expect ‘more normal’ mid to single-digit returns, dominated by income rather than capital growth.
We continue to monitor the situation and as soon as the fund moves back into a position of net inflows, the price should swing back up to creation.
Additionally, the fund has significant levels of cash, which enables Fiona to meet current redemptions without having to sell holdings. As at the end of April 2016, the level of cash in the portfolio stood at 10.1%, or £469.7 million.
Please find below an explanation of our pricing policy and the reason for the magnitude of the downward swing.
Fund pricing basis
In summary, the dealing price received by investors buying or redeeming units in the fund is likely to be based on either the creation or cancellation price. Occasionally, it may be based on a price between these two points.
The creation price is effectively the cost of creating a unit in the fund, based on the costs of purchasing assets within the fund and includes Stamp Duty Land Tax, agent’s commission and legal and other expenses, currently amounting to some 6.1%.
The cancellation price is effectively the proceeds from the sale of a unit, based on the assets held by the fund and the costs of disposing of those assets including agent’s commission and legal and other expenses, of some 1.15%.
In total, therefore, transaction costs currently amount to around 7.25%.
Transaction costs apply to the physical property only, so the swing the fund has experienced is lower due to the cash component of the fund, where transaction costs do not apply. Property transaction costs are illustrated in the chart:
Changes to the fund pricing basis
Changes to the pricing basis, from creation to cancellation and vice versa, are made if the pattern of net flows into the fund – subscriptions less redemptions – changes direction. This process is designed to ensure equitable treatment for all investors.
The effect of the price swing on the value of the fund’s assets
The price swing has no bearing on the value of the fund’s underlying assets. The chart illustrates what happened to the value of the fund when the price swung back in May 2013. Please note the quarterly dips in fund value are when the fund paid a dividend.
Does a price swing mark the end of the property cycle?
UK commercial property has delivered three strong years of total return for investors. At the start of the year, while we continued to see inflows, there have been sporadic cases of one or two of our larger discretionary clients reducing their exposure to property, rebalancing their portfolios. While the frequency of these trades has risen, causing the swing, we do not believe this is a signal that represents the end of the property cycle.
Instead, for long-term investors, we believe it is important to take stock, safeguard against a knee-jerk reaction, and consider the property market fundamentals. Relative to other income-generating asset classes, property still has an attractive yield. At the property level, buoyant tenant demand and insufficient supply are combining to create rental growth across the regions, helping to compensate for the deceleration of capital growth by yield compression.
Looking ahead, over the next three years, we are forecasting UK commercial property returns of 6% pa, most of which will come from income generated by investing in property. Finally, in an uncertain world, property at the portfolio level has traditionally exhibited attractive diversification benefits.
