In May Ainslie McLennan returned from six months leave after the birth of her second child. But little did the lead manager of Henderson’s £3.3bn UK Property fund realise that just weeks later she would begin the most challenging period in her 20-year career in investment management.
This month the fund reopens to redemptions after the Brexit-inspired meltdown that savaged every other commercial property fund in the country. And McLennan is visibly relieved she has steered the giant fund successfully through such a tumultuous period.
“It has been an unbelievable period, professionally and personally extremely challenging,” says McLennan, who is at the helm of a nine-strong team managing the fund.
Ahead of the referendum result, the fund enjoyed a cash cushion equal to 15 per cent of its assets. McLennan actually happened to think that the expected remain result would open up some interesting opportunities on which she could spend the cash. Instead she was forced to become a firefighter as redemptions spiralled when the shock result emerged.
“There was a spike in redemptions on the day of the result. We applied a 5 per cent fair value adjustment, and over the following week, certainly in the first couple of days, there were more redemptions than usual, but it went calmly.
“But once the other funds started to be suspended, it produced some very unusual investor behaviour patterns, with a contagion effect from other funds.”
At the time the decision was taken to close the door, the liquidity in the fund was really not that bad – in the high single digits – but the writing was on the wall. It then fell to McLennan’s team to liquidate assets so that it could, at a future date, confidently reopen for business.
First to go were the most liquid assets. Now ‘liquid’ in a bricks-and-mortar fund means something very different to an equity fund, but it is surprising just how much she was able get her hands on – and the sort of prices she achieved.
The most liquid positions were some of the big logistics centres the fund holds, and where it was overweight ahead of the referendum. They were more liquid because there is a steady stream of buyers wanting to get exposure to logistics – which are basically the distribution centres for goods we now buy over the internet rather than on the high street.
Among the sales was the Amazon distribution centre in Peterborough. The fund had only acquired it in December as part of a larger portfolio, and McLennan managed to dispose of it with a positive return of 5 per cent during the period it was held.
Kellogg’s distribution centre in Trafford Park, Manchester, was also sold at “an extremely competitive price” which represented an annualised gain of 8 per cent since its purchase in 2013.
It may have looked like a fire sale, but it certainly wasn’t reflected in the prices achieved. “We managed to sell assets at compelling prices. We have not had a single issue with the prices of the assets we have sold. On every sale completed we have achieved a positive return.”
She does, though, acknowledge that buyers were in the market because logistics represent good value. “We bought into logistics at a good time, and the rents were not looking too toppy. They are at a good point in the cycle.” The fund’s position in logistics is now broadly neutral, and McLennan is not looking to reduce that further.
Some of it has been painful, and it’s meant the team working evenings and weekends across the summer, but the work has put the fund in a good position to reopen.
“We have done these deals in the most orderly way we can, and for the situation not to go on too long, so we can re-open the fund. And it’s not just about opening for redemptions. There’s actually a queue of people who want to get in as well.”
What does the whole episode say about the legitimacy of bricks-and-mortar funds as a suitable vehicle for retail investors, and their understandable need to buy and sell when they wish?
McLennan is adamant that they should remain a core fund choice for small investors. “They absolutely work. Look, this fund has never been suspended before. It was an absolutely extraordinary vote. We did have enough of a cash cushion, but there was contagion, and we dealt with that. If there’s a lesson, then maybe it’s to hold a bit more cash.”
The arguments for remaining in commercial property funds are secure. “People have had very good long term returns from commercial property and they continue to give a solid income. We have not wavered on that.”
The fund, after its price drop, now yields 4 per cent, which is attractive by almost any measure at the moment. McLennan is considering lowering her London and south east exposure, partly because foreign investors are enjoying a huge currency benefit, and its the south where they look first to buy. But the fund will always have a high south east weighting, she adds.
Re-balancing the fund will take it further north, but after the Brexit vote it’s not going to be straying much over the border into Scotland. It pains McLennan as a Glaswegian, she says, but the country’s risk profile is now just that bit higher.
Brexit, she argues, has barely yet begun, with all the challenges and opportunities that presents. But never forget, she says, the underlying attractions of the asset class. Her big message is that property remains a brilliant store of value – and dividends – despite the storm it has gone through. “The proper story on property just isn’t being told at the moment,” she says.
Ainslie McLennan joined Henderson in 2002 and has run commercial property fund mandates investing both directly and indirectly in UK and European markets. She has run the Henderson UK Property PAIF and the Henderson UK Property PAIF Feeder fund since 2009. In April 2014 McLennan transferred to TH Real Estate as part of a joint venture between Henderson and TIAA-CREF and was appointed head of UK Balanced funds at TH Real Estate, which is now solely owned by TIAA-CREF. Prior to Henderson, Ainslie worked at a private property investment practice in Scotland.
£3.3bn Assets under management in the Henderson UK Property fund
4% The fund’s current yield
1999 The year the fund launched
9 Number of people on the fund’s management team
It has been a particularly testing time for property funds over the past three months but Henderson UK Property had a reasonable cash position when faced with a tide of redemptions. An overweight in large logistics centres, which are in high demand, proved beneficial to the fund as it moved to liquidate assets and it managed to achieve positive returns on every sale. McLennan is now happy to re-open the fund and is optimistic it will attract new investors.