M&G Property Portfolio (GB00B8G9TT83), an IC Top 100 fund, has changed its legal structure, which means investors may be able to hold the fund in a more tax-efficient way. The fund, which invests in a diversified portfolio of commercial property mainly in the UK, has converted from a unit trust into a Property Authorised Investment Fund (PAIF). It is the first property fund easily available to private investors to do this, even though the legislation has been in place since 2008.
Property unit trusts pay 20 per cent tax on income, which cannot be reclaimed even if you hold it in a tax-efficient wrapper such as an individual savings account (Isa) or a self-invested personal pension (Sipp) or are a non-taxpayer. But PAIFs distribute their income gross, so investors can benefit from holding the fund in a tax wrapper.
M&G has borne the costs of the conversion so it will not detract from the returns of the fund.
Some property funds are domiciled offshore in jurisdictions such as Jersey or Guernsey and also don't incur this tax. However, funds there are not UK regulated and covered by the Financial Services Compensation Scheme, so in the event of insolvency investors would not qualify for compensation.
It is anticipated that more property funds will convert to the PAIF structure this year, and fund providers said to be working on this include Aviva. However, some fund investment platforms may not be able to host the new PAIF structures because they are unable to administer the more complicated income structure. PAIFs distribute three streams of income: rental, dividend and interest.
We tipped M&G Property Portfolio two years ago (read the tip) at 72.8p on the grounds that it offers an inflation hedge, had performed well and targeted better-quality property with tenants less likely to default in tough times. Two years on and the fund's manager, Fiona Rowley, continues to maintain her cautious approach. "With continuing uncertainty over the economy, the outlook for rental growth in prime property remains muted," she says. "In this environment, the two-tier market for UK property has persisted, with weaker properties still struggling to maintain valuations and income dominating returns even in the prime end of the market. Looking to the medium term, the shortage of new properties, due to the limited availability of development finance, should be beneficial for rental values, helping to bolster growth."
Ms Rowley says the fund is defensively positioned for the difficult economic climate, with prime and good secondary assets that should provide stability in the current environment of weak rental growth. More than a quarter of the fund's income has some embedded protection from the negative impact of inflation through retail price index (RPI) linked and fixed rental uplifts, which can help during periods of low or no growth. It also has 19.2 per cent in cash though this could be a drag in rising markets.
Over recent periods the fund has lagged the mean return for the IMA property fund sector, although it has a decent yield of over 3 per cent.
M&G PROPERTY PORTFOLIO A INC (GB00B8G9TT83)
|IMA SECTOR:||Property||SHARPE RATIO:||2.61|
|FUND TYPE:||Property Authorised Investment Fund||ONGOING CHARGE:||1.67%*|
|NO OF HOLDINGS:||147*||MINIMUM INVESTMENT:||£500|
|SET-UP DATE:||8 November 2005*||MANAGER START DATE:||2007*|
|STANDARD DEVIATION:||1.06%||MORE DETAILS:||mandg.co.uk|
Source: Morningstar & *M&G
|1-YEAR TOTAL RETURN PERFORMANCE (%)||3-YEAR TOTAL RETURN PERFORMANCE (%)||5-YEAR TOTAL RETURN PERFORMANCE (%)|
|M&G Property Portfolio A Inc||0.57||10.8||-2.46|
|IMA Property (mean)||
Source: Morningstar as at 25 January 2013
Top 10 holdings as at 31 December 2012
|Castle Vale Retail Park||Birmingham|
|Alder Castle 10 Noble Street||London|
|Tesco Extra White Cliffs Park||Dover|
|Ravenside Retail Park||London|
|Tesco Supermarket Kilverstone||Thetford|
|Stanley Green Retail Park||Cheadle|
|Tesco Supermarket Loudwater||High Wycombe|
|Acergy UK Regional Campus||Aberdeen|
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