Are Property Funds Heading for Extinction?

Editor's Views: It’s no surprise that some fund groups are wrapping up their property funds but this may be more to do with ditching an out-of-favour theme

Holly Black 25 June, 2021 | 11:08AM
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And another one bites the dust in the open-ended property fund sector. This week Aegon announced it would be shuttering the Aegon Property Income fund, just weeks after Aviva reached the same conclusion on its own property fund.

Is this investment Darwinism in action? Many property funds have been shuttered on and off since the Brexit vote five years ago (Yes, that was five years ago already! Here are the best and worst performers since the vote), seemingly never quite able to get back on an even footing.

Many commentators have accused these funds of not being fit for purpose. And it’s true there is a complete liquidity mismatch. A fund structure where investors are able to buy and sell on a daily basis simply does not suit a portfolio which is investing in huge office blocks and retail parks that take months to buy and sell.

And the problem with gating a fund, of course, is that it makes investors panic. Even if they weren’t planning to sell, investors don’t like the idea of not being able to sell. So when the doors open, there’s an exodus. And we’ve been seeing that in our monthly flows figures for a while now. The M&G Property Portfolio fund, for example, has suffered redemptions of more than £800 million – losing a third of its assets.

So it’s no surprise that some fund groups are saying enough is enough, and wrapping up their property funds. But I’m not sure whether this is survival of the fittest, or survival of the theme-ist.

The cynic in me would point out that investment groups are very quick to jump on the coat tails of the latest fad or trend. We only have to look at how many tech-type funds or ESG offerings are springing up at the moment to see that. The closure of property funds may then be less about serving investors as it is about serving profits. But if the end result is that we solve a long-term liquidity issue in the market, maybe it doesn’t matter how we get there.

Shooting for the Stars

This week we looked at the funds and stocks that could help you tap into the space race, a hot topic at the moment, given that someone just paid $28 million for a 11-minute trip to the edge of space with Jeff Bezos (that's when you know you're good company!). 

Turning an exciting theme into an investment is not always easy (good stories are often bad investments), and this is especially true in new realms such as space travel where there are few businesses in the industry, and even fewer that are publicly listed.

Tracker funds focusing on the sector may seem like an easy way to tick the box, but if you look under the bonnet you might be surprised to see some relatively middle-of-the-road names in their portfolios such as Boeing and Lockheed Martin. Because a space ETF might be a simple way to home in on a trend, but it still only has access to the same names you do.

Still, I do think there is some merit in dabbling in such themes through more generalist companies, which only derive a small amount of their revenues from the industry. It might not be as exciting as putting all your money into Infinity and Beyond Inc (NB: not a real company, as far as I know), but it’s probably a whole lot safer.

See You Next Week at MICUK

The 15th UK Morningstar Investment Conference takes place next week, and while we can’t yet see you in person because of the all the rules and regs, we will still be streaming live two days of top-notch investment content.

We’ll have Morningstar Investment Management’s Mike Coop talking all things inflation, behavioural expert Sarah Newcomb talking about why investing and emotions go hand in hand, plus sessions on alternatives, greenwashing and disruption, and appearances from some of the best fund managers out there.

If you’ve not yet signed up, fear not, there’s still time. We’ll see you there!

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk