LGIM's James Crossley
Intermediaries pulling clients’ money out of open-ended property funds (PAIFs) based on regulatory fears is a “travesty for investors”, according to Legal & General Investment Management’s James Crossley, who said they will be missing out on “diversity, growth, steady income and low correlation to other assets”.
Crossley, who is head of UK sales at LGIM, warned there has a been a broad-brush negative approach to PAIFs, which reared its head in 2016 when the funds were forced to shutter ahead of the UK's EU referendum. Their reshuttering during the Covid crisis and subsequent scrutiny from the Financial Conduct Authority - which could lead to regulatory changes requiring 90- to 180-day notice periods for property funds - has led to meaningful redemptions across the IA UK Direct Property sector.
According to a poll conducted by AJ Bell last year, some 54% of DIY investors on its Youinvest platform said they would sell out of their open-ended property exposure completely if a three- to six-month notice period was implemented.
The latest PAIF-related development to spook investors has been Janus Henderson's decision to sell its UK Property PAIF to a single buyer, thereby returning assets to existing investors.
Crossley said: "We have the largest PAIF structure in the market at £2.2bn and we constantly liaise with the regulator, which has been reviewing whether there is need for a notice period.
"We are working closely alongside them and we are very proud of our fund's performance - it has been fantastic.
"Some people have been selling out of property - including our own fund - especially with the Janus Henderson fund about to close. But, taking my corporate hat off and putting my personal hat on, the travesty for investors is that open-ended property gives them diversity, growth, steady income and low correlation to other assets."
Since May 2019 - which is as far back as FE fundinfo's data stretches - L&G UK Property's assets under management have fallen by 27.1%. In total return terms, however, it has significantly outperformed its sector average over one, three, five and ten years, having returned 19.8% over the last year alone while its average peer has gained 11.6%. It has also quadrupled the returns of global equities, as measured by the MSCI ACWI index, which is up 4.6% over the last 12 months.
"I think it is really sad that people are being taken out of PAIFs and put into other parts of the market because of the fear of what might happen," Crossley said.
"The regulator has not made a decision yet. And even so, it has made very clear that if it does indeed put notice periods on these funds, there will be a grace period of implementation for advisers, wealth managers and platforms - the whole ecosystem."
He added that another reason investors are reticent about investing in L&G UK Property has been its spread - given it operates on a dual pricing system - which stood at 6% at entry level.
"Because we have been in net redemptions and because we are not buying property, and we are therefore not paying stamp duty at 5%, we have reduced the spread from 6% to 1% on a temporary basis. This is closer to what you would pay for an equity or bond product," the head of UK sales said.
"Even though I am biased because we run the largest property fund in the market, it really is a great investment. I get upset when I hear about end investors being moved out of property and into cash or what is effectively beta, because I fear they are missing out.
"We cannot second-guess what the regulator is going to do, but ultimately it is there to protect investors."
Hybrid fund launch
That being said, Crossley told Investment Week LGIM is considering the launch of a hybrid fund, which will hold a combination of cash, REITs and direct property. Exposure to the latter would be kept below 50%, which would mitigate the need to implement a notice period on the fund.
"People are still buying [L&G UK Property], but people are selling out for fear-related reasons. My one impassioned plea is for investors not to panic about property because there is no need.
"The big irony is that a lot of people already own their homes and, if they do not, they are actively aiming to become homeowners themselves. Residential is different from commercial, but it is still tangible and you can still touch it. If you like property then hold it, and if you want to add to property then add to it."
Dynamic Bond fund revamp
Elsewhere in the business, LGIM is looking to "augment" its £189m Dynamic Bond unit trust, which has seen its AUM slide by 23% since May 2019 to £189m.
"There are a lot of brilliant bond fund managers out there and we are on a journey to becoming included in the broader conversation for that," Crossley said. "I think it is foolish to say all fixed income is out of vogue at the moment; I still think people need exposure to fixed income - particularly across their risk models - but I think it is more about diversified and flexible fixed income.
"Don't get me wrong, we have seen the perfect storm for fixed income in the form of geopolitical uncertainty, the Ukraine crisis and the rising cost of living. But I do think the difference now, relative to the Lehman's collapse or the tech bubble bursting in 2000, is that people are more informed - a lot of clients we speak to now are much more long term in their approach, more considered and balanced."
Future plans for the Dynamic Bond fund - which has been headed up by Colin Reedie and Matthew Rees since 2019 and 2021 respectively - will give it an "ESG tilt".
"This is not reverse engineering to take money - greenwashing is a hot subject," Crossley continued. "We are telling people what we are enhancing what we already have, and working very closely with the regulator to do so to make sure there is no greenwashing at play.
"You are going to see more and more ESG evolution of products so that, in five years' time when we are sat having a conversation, there will be no ‘core' and ‘ESG versions' of products. ESG is now the overriding feature in almost everything we do now. Not every product we have can be ESG, but a lot certainly can."
