Property Funds - change of pricing

What has happened?

Threadneedle, Standard Life, Henderson and M&G have announced a change to the way they price their property funds.

Why?

All unit trusts change their pricing basis depending on the fund's flows. When a fund experiences inflows (more money coming into the fund than leaving), it is usually priced on an 'offer' basis; if the fund has greater outflows, it is often priced on a 'bid' basis.

For some time, these property funds had been valued on an 'offer' basis, but were recently changed to a 'bid' basis to reflect that more money was flowing out of the funds than flowing in. When a fund moves from an offer to a bid basis the price falls; investors in the above funds saw a fall in the value of their investment, of around 5%, on the day the price change occurred. When the funds revert back to an offer basis the prices should jump back up by a similar amount. The change in pricing protects existing investors in the fund, effectively limiting the amount that is withdrawn by reducing the unit price. Long term investors should therefore not be overly concerned.

The costs involved to buy and sell property are substantially higher than those incurred on shares or bonds. The change in pricing basis for property funds therefore has a greater impact on the overall value of an investment.

It is important to remember that funds price on a forward basis. Therefore investors never know in advance the price they will receive if they sell or buy or whether the fund is pricing on a bid or offer basis.

For more information on how managers price their funds, please download the HL guide to Fund Prices, Savings and Yields.

Our view

We do not believe unit trusts are an effective way to access the property market. Aside from pricing issues, property funds tend to receive large inflows when property prices are buoyant, which can result in them holding high levels of cash while the managers search for a suitable investment – therefore missing gains in the market.

The same situation occurs in reverse when the property market is performing poorly. Investors request a return of their capital and the manager needs to sell properties to meet the redemptions. In falling markets it is often only possible to find buyers for the most attractive properties, leaving the most unattractive ones in the fund for the remaining investors. In extreme circumstances, as properties can be difficult to sell, the managers can apply to the FCA for permission to suspend redemptions from the fund and investors may discover they cannot withdraw their investment when they wish.

Past performance is not a guide to future returns.