Hargreaves Lansdown has dropped the £374m Threadneedle UK Property Trust from its Wealth 150, citing problems with the fund’s open-ended structure and its investments in an illiquid asset class.
The trust, managed by Don Jordison, was launched in February 2007. The trust gained 3.9 per cent in the last three years, compared to the average fund in the UK property sector returning 29.5 per cent.
According to Hargreaves Lansdown investment analyst Rob Morgan, the open-ended structure of the unit trust caused difficulties when dealing in its illiquid investments. He says daily trading became impossible due to the fact that buying and selling any kind of physical property is often a lengthy process and can cost up to 7 per cent of the value all told.
He says: “We believe Jordison and his team remain the best managers in the sector for exposure to commercial property ‘bricks and mortar’. However, we have grown increasingly uncomfortable that a property team’s outlook and decisions may not be fully captured by a fund of this type.”
Morgan says problems were seen during the periods of considerable inflows. During this time, Jordison had grown bullish as investors anticipated a rebound in property prices but he was unable to deploy the new money quickly to reduce the large percentage of the fund held as cash. As a result the fund failed to fully capture the rally as the market rebounded.
A similar situation arose with outflows during times of pessimism when a manager must sell desirable properties they would rather keep.
Morgan says: “We believe the Threadneedle team have been prudent in keeping a good cash buffer in the fund, but it shows that an open-ended fund structure for this asset class is not optimal.
investment decisions could end up being made for technical rather than investment reasons, and even the best-quality managers can struggle against an unpredictable flow of inflows or outflows.”
However Morgan is keen to stress this is not an indication to sell, highlighting that at present, the balance between inflows and outflows are relatively stable. The fund’s level of income is also relatively attractive at over 4 per cent variable.
Provided the fund still meets with individual investors’ objectives and that it is intended as a long-term investment of five to 10 year plus, he believes existing investors should hold.