M&G Property has solid merits

With consumer price index (CPI) inflation in the UK rising to 3.7 per cent, and growing concerns about global inflation driven by the emerging markets, it could be time to protect your capital against this.

The best way to do this is to ensure a decent weighting of equities and property in a portfolio. For the property allocation, M&G Property Portfolio unit trust looks a good choice. The fund invests in bricks-and-mortar rather than property shares, and so provides better diversification when held alongside equities.

The fund looks well positioned for tough times with well-heeled tenants who are less likely to default. M&G focuses on the top end of the market as evidenced by its current vacancy rate of just 2.8 per cent, compared with the market average of 8.2 per cent. True, there is downward pressure on rents, but the M&G fund benefits from an average lease length of almost 14 years compared with a market mean of around 10. Better quality properties also tend to be the first to benefit as rents start to rise again.

Around 23 per cent of the portfolio is also hedged against inflation, via properties with rent increases fixed over time or pegged to the rate of inflation.

The fund's manager, Fiona Rowley, is seeking to grow rental income, which should enhance capital values, in contrast to the past two years when she focused on maintaining income. The fund generally seeks a balance between income enhancing and performance enhancing properties, though is starting to place more emphasis on the latter.

However, you should bear in mind that cash accounts for around 17 per cent of the trust's assets. "It is sensible for property funds to hold reasonable levels of cash," says Patrick Connolly, of independent financial advisers AWD Chase de Vere. "However, a potential risk is that it proves too popular, making cash levels too high."

Nor is the fund's dividend yield – at 3.07 per cent – the highest in the Investment Management Association's (IMA) property sector. Then again, the fund aims to maximise long-term total return (income and capital growth combined).

Another aim is to avoid over exposure to one sector or region. However, at present the fund mainly invests in retail-related properties, with shops and shopping centres accounting for more than 29 per cent of assets and retail warehouses more than 15 per cent, albeit a lower exposure to this area than late last year. Not so good, perhaps, if you fear for the outlook for UK consumer spending.

Ms Rowley, a surveyor by training, has been lead manager of M&G Property Portfolio since 2007, and was deputy manager when the fund was launched in 2005. She joined M&G's parent company in 1994 and before that worked for estate agents Knight Frank. "M&G boasts a vastly experienced investment team, which has built a long and consistent track record and is able to access some opportunities through its contacts that competitors are not always able to," adds Mr Connolly.

Another concern is that the fund is open-ended, so investors can withdraw their money on demand. If the fund had too many withdrawals simultaneously, it could have difficulty meeting redemptions because properties can hardly be sold at the drop of a hat. That, however, should be more a technical difficulty than a real one.

Key fund data:

Source: Investors Chronicle, *M&G, **Morningstar.

Performance data as at 20 January 2011.

Top ten tenants as at 31 December 2010

Sector split