Investment trust insider on closed-end property

Investment Trust Insider on Perpetual Income and Growth

Investment trust insider on closed-end property – James Carthew: four bargain property trusts open-ended investors could consider

[First on the agenda this week is to congratulate Octopus Renewable Infrastructure Trust (ORIT) and its broker, Peel Hunt for pulling off the biggest fundraise of 2019. Having targeted £250m, the trust managed to raise £350m. The Schiehallion Fund (MNTN), which came to the market in March, is a bigger trust but it rolled over quite a bit of money from an existing fund. I’ll have a look at ORIT some time next year, after it is up and running.] – this didn’t make it into the online magazine piece, not sure why.

I couldn’t let the M&G Property Portfolio dealing suspension go unremarked. I know I have been banging on about liquidity mismatch issues all year but, to my mind, the Financial Conduct Authority is suffering from a dereliction of duty in allowing the continued existence of open-ended direct property funds.

We keep being told that the answer is to extend the notice period for dealing in these funds, but how does any retail investor (or professional one for that matter) know with certainty that they want to sell a fund six-months to a year in advance?

As things stand, the requirement to keep cash on hand to fund redemptions is killing the returns of the open-ended funds. M&G were talking about running routinely with 7.5% to 12.5% cash! It is not even as though they aren’t charging fees on that. Open-ended funds in the IA UK Direct Property sector have returned on average -1.6% over a year, 3.5% a year over three years and 3.2% a year over five years.

The equivalent figures for the AIC’s UK Commercial Property sector are 4.5%, 6.2% and 9.1% annualised growth in underlying net asset value (NAV) and 4.7%, 3.8% and 4.1% in annualised total shareholder returns. The M&G fund returned -8.3%, 0.5% and 0.5% a year over the same periods.

To underline this message – only one fund in the open-ended sector (TIME Freehold Income, which invests in ground rents) outperformed the average for the closed-end sector over the past year.

As you can see from the numbers, there is a clear disconnect between the NAV and share price returns on the closed-end funds. Discounts have widened for some real estate investment trusts (Reits) and for four of them these now exceed 20%.

AEW UK Long Lease Reit (AEWL), which trades on a 21.6% discount, shot itself in the foot massively when it seemingly panicked over the loss of a large tenant (which went into administration). The space was re-let pretty quickly and on the same terms. However, in the meantime, the board fired the manager and kick-started an offer period for the company.

When the board changed its mind about finding someone to take it over, the share price dived and the discount has been wide ever since. AEW, the outgoing manager (their contract expires next April), is one of the world’s largest managers of real estate. It has the clout and the resource to run the fund properly and back further fundraises. That’s why (I didn’t write this!) 28% of the votes at the AGM were cast against the re-election of the chairman. Now the trust is in limbo. There may be upside if it can find a merger partner or if it opts for liquidation.

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