Following the publication of the IC Top 100 Funds 2013 in the 6 September issue, we have received several questions from readers about the property funds selected for the list. Here is a selection - together with our answers.
Q. After reading a number of IC articles, I feel it is advisable to add a property element to my portfolio, and the Top 100 Funds helps narrow down the selection of funds available.
The new entrant, TR Property Investment Trust (TRY), is my preferred option. But the performance fee of 15 per cent per annum (payable if the group's total return is greater than the fund's benchmark plus a hurdle of 2 per cent), indicated on the IC web page, seems very excessive.
I have reviewed the last report and could not identify a description for the performance fee. However, the fund's ongoing charges, including performance fee, were less than the IC target of 1.5 per cent.
A. In theory, a fee that increases with performance helps align talented fund managers' interests with those of the investors, leading to better outcomes all round. However, the case is not proven.
Our view at IC is that investors may accept a performance fee if it is the only way to back a genuinely talented fund manager. But they should look closely at the structure of performance fees, where the devil is in the detail. Some fee structures can influence the manager to increase or lower the risk of the portfolio, regardless of the investment opportunities on offer, in pursuit of their fee.
Best practice in performance fees would be for a fund to have a high water mark above which it charges a fee, based on an appropriate timescale of say three years, to ensure it isn't charging a fee just because it beats the return from cash.
TR Property charges a performance fee if certain objectives are met. The fees are summarised on the IC's web page for the trust, powered by Morningstar; however the summary is incomplete. Morningstar has agreed to change this at our request.
As detailed in TR Property's annual report, the base fee for the year to March 2014 is 0.20 per cent per annum of the net asset value, plus a flat fixed fee of £3.325m.
In addition to this, the managers receive a performance fee if the trust's NAV total return is greater than that of the trust's benchmark, plus a hurdle of 1 per cent over the accounting period. The performance fee is calculated at 15 per cent of any such differences in total return figures, but is capped at 2 per cent of shareholders' funds.
If, in any period, the fund's total investment return underperforms its benchmark, no performance fee will be payable in subsequent periods until such underperformance has been rectified.
The fund earned a performance fee of £3.122m in the year ended 31 March 2013, but did not earn a performance fee in the year to 31 March 2012.
The ongoing charge for the fund, including the performance fee, for the year to 31 March 2013 was 1.9 per cent.
Q. Out of the six investment trusts that I hold, there is only one not recommended by you or Bestinvest and that is F&C UK Real Estate Investments (FCRE). I got into it as a result of holding Isis Property Trust [recommended by IC at the time] which was merged with IRP Property Investments and renamed as FCRE. I am not saying it should necessarily have been included in the Top 100 Funds, but it has not been reviewed at all since the reconstruction, despite having a lower premium and higher yield than F&C Commercial Property Trust (FCPT) and UK Commercial Property Trust (UKCM). Surely, the IC could express some view - even if only to say it will be assessed later when more information is available?
A. IC's property writer Stephen Wilmot says: "I'd be inclined to be positive on FCRE. We're bullish on regional property, and the trust looks a safe way to play it: gearing is modest and the 6.6 per cent dividend yield should be covered next year." We will try to run a full update when fuller information is available.
Q. Two key aspects of UK commercial property need mention.
First, prices of bricks and mortar funds are determined by surveyors' valuations not the stock market. Second, successful funds tend to avoid retail which is being attacked by online shopping and concentrate in the South East outside of which things are still dire. Henderson UK Property (ISIN: GB0007278608) stands out in this regard - what do you think?
A. Henderson UK Property was recommended in the IC's recent analysis of the sector by deputy personal finance editor Leonora Walters as a good low-risk option. You can read the article here.
It certainly has less retail exposure than M&G Property Portfolio (ISIN: GB00B89MXM58) – 18.9 per cent exposure compared to 40 per cent exposure in the M&G fund.
However, the Henderson fund has a 20 per cent cash exposure compared to M&G's 13.5 per cent exposure to cash. Cash, which gives a fund flexibility to invest quickly and meet redemption requests, could also be a drag on performance and dividends.
