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Extra costs in commercial property funds called into question

Money-Coins-Pound-Currency-Close-up-700x450.jpgExperts have questioned if the extra costs within commercial property funds should be part of the total cost of products due to asset managers’ varying disclosure practices.

New European rules such as Mifid II and Priips require fund managers to report transaction costs separately from the annual ongoing charges figure to give a more transparent picture to consumers.

For commercial property funds, extra costs such as service repairs, maintenance, or management of the property are usually reported separately in different reports of the funds, such as the Key Information Document.

However, in light of increased scrutiny on fees, experts argue that including these costs in the ongoing charges figure would offer consumers a fairer picture of the actual costs they pay to the fund houses.

Most of the asset managers running commercial property funds contacted by Money Marketing say the ongoing charges figure is not supposed to include these extra costs.

One year on from the commercial property funds saga

According to a Janus Henderson spokesman, which runs the £3bn Henderson UK Property PAIF fund, the OCF definition “does not allow” for other property costs to be included.

Extra costs are published separately as the “property expense ratio” in the annual report and accounts of the fund.

As of November, this cost is 0.37 per cent, which increased from 0.25 per cent in May 2015, according to the fund’s accounts. The fund’s ongoing charge is 1.65 per cent.

The property expense ratio for the property fund at Columbia Threadneedle Investments is also excluded from the OCF and is disclosed as a separate figure in the KID required by Ucits funds, as well as on the company’s website. The fund factsheet as of February 2018, has a property expense ratio of 0.76 per cent, as of November 2016. The OCF is 1.62 per cent.

M&G, which manages the £2.3bn Property Portfolio fund, says it has always chosen to include the property expense ratio in the ongoing charges figure “to give clients full transparency of the fee charged to the investor”, though this is not required by regulation, the firm says.

Charges for the funds are 1.22 per cent, and transaction costs are 0.05 per cent, according to the M&G website. However, the KID for the fund shows total charges are 1.45 per cent.

Gibbs Denley Financial Services investment manager Tom Sparke explains the costs of property renovation were implied by the OCF figure historically, but not transparently. He also notes that the calculation of extra charges is not uniform among groups.

He says: “It would be useful if figures for maintenance and improvements were stated, in context, by the fund provider as this would make the costs more explicit, as well as showing the potential added value of such work.

“We treat each fund on its own merits and consider its potential performance and diversification benefit and its costs in relation to the peer-group and the investment model portfolio as a whole.”

However, Shore Financial Planning director Ben Yearsley argues the extra costs should not be included in the OCF of the fund since they are effectively included in the overall return to clients.

He says: “You don’t include running costs of listed equities, such as the chief executive pay, in returns so why should running costs of direct property be included? The current rules allow a like-for-like comparison between funds with different types of underlying assets, which seems a sensible way of doing things.

“We are getting there on charges. OCFs are far more comparable now than, say, five years ago and I’m comfortable with what’s included overall.”

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Transaction costs at commercial property funds vary from one fund to another, data shows.

This means that, like other mutual funds investing in shares or bonds, property funds have been affected by the different cost calculations methods Priips and Mifid II have introduced.

However, Hargreaves Lansdown senior analyst Laith Khalaf says the variation of transaction costs is not unusual as property funds’ costs might be driven by flows to a greater degree than other type of funds.

He says: “Equity funds trade much more than property funds. If you hold an equity fund, you can have 50 underlying shares that you can sell. In a property fund, you might have 50 properties but you can’t sell a part of a property… That is why you have very different transaction costs for those funds.”

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