Top 100 funds update: M&G Property Portfolio

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.

Source: Morningstar & *M&G

Source: Morningstar as at 25 January 2013

Top 10 holdings as at 31 December 2012

Sector breakdown