TR Property Investment Trust – June 2020 update

• Marcus Phayre-Mudge is an experienced, highly regarded property investor
• He thinks markets aren't recognising the value of some property companies, which can result in them being taken over by competitors
• Total annual dividend of 14.0p per share, an increase of 3.7% from last year

How it fits in a portfolio

This trust tries to grow your money and provide a rising income by investing in property-related businesses internationally, and physical property in the UK. It could bring some diversification to an income-generating portfolio. Or the income could be reinvested to try and deliver a higher rate of long-term growth. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to NAV.

Manager

Marcus Phayre-Mudge has managed the trust since 2011 but has analysed and invested in property companies for more than two decades. He also serves as co-manager on the BMO Property Growth & Income Fund and the BMO Global Real Estate Securities Fund. These funds share similar investment processes and there's a high degree of coverage overlap between them, so we don’t feel the manager's overstretching himself.

Phayre-Mudge has the support of deputy manager Alban Lhonneur and George Gay, manager of the trust's physical property portfolio. They've both been at Thames River Capital (now BMO Global Asset Management) for well over a decade and built up experience at previous firms too.

The managers are also supported by a team of equity and portfolio analysts.

Process

The trust aims to invest in well-managed property companies with excellent long-term growth potential. The managers take a flexible approach and invest in companies of all sizes, including higher-risk smaller ones.

They can invest in companies across the globe, but tend to stick to Europe. Around a third of the trust invests in the UK, with a further 30% in Germany. Largest investments currently include include Germany-based residential property giants Vonovia and LEG Immobilien, and French Real Estate Investment Trust (REIT) Gecina.

The managers think the value of some property companies isn't being recognised by other investors. If a company is persistently undervalued by the market, other companies often step in to take advantage, resulting in mergers and acquisitions. That happened with a number of the trust's investments over the year in review. Family-run industrial property owner A&J Mucklow was an example. The trust owned 5% of the company and supported a takeover by competitor LondonMetric in May last year.

The trust can invest up to 20% in UK-based physical property, although as at 31 March it accounted for 7.8%. Investments in this section of the portfolio include a 50,000 square foot industrial building in Bristol. Warehouses that enable the movement of goods are increasingly sought after because of the growth of e-commerce. The building's previous lease came to an end in November 2019 and the managers negotiated a 47% rent increase for the next five years.

The managers can use gearing, which means they borrow money to invest. It could boost returns when prices rise, but the reverse is also true so it increases risk. At the end of March 2020, the trust's gearing stood at 7.6%.

Culture

Phayre-Mudge and his team at Thames River Capital took control of the trust in 2011. At that time, Thames River was owned by F&C Asset Management, but in 2014 F&C was taken over by Canadian financial services giant BMO Global Asset Management. Corporate change can be a distraction for a fund manager, but six years on, the dust is well settled and we think it's positive that the managers can leverage the joint resources of the two businesses.

The managers take social responsibility seriously and think good corporate governance is key. They think well-managed companies tend to have lower risk of government and regulatory intervention which could cause a negative impact on the business and its reputation. The managers also consider the environmental statements published by the companies they invest in. Within the physical property portfolio, an environmental assessment is carried out before any purchase to identify contamination or materials that could be considered harmful.

Cost

The trust’s ongoing charge was 0.61% over the year in review although a performance fee of 0.19% was also applied, making the total charge 0.80%. You can find out more about the risks and charges in the Key Investor Information and annual report and accounts.

If held in a SIPP or ISA the annual HL platform fee of 0.45% (capped at £200 p.a. for a SIPP and £45 p.a. for an ISA) also applies. Investment trusts are free to hold in a Fund And Share Account.

Performance

In the year to 31 March 2020, the trust's Net Asset Value (NAV) fell 11.5% compared to a loss of 14.0% for the benchmark. The share price fell 16.8% as the discount widened amid the coronavirus crisis and subsequent stock market volatility.

One of the trust's best performers was French logistics owner and developer Argan. The company acquired a portfolio of logistics units, increasing the size of its own portfolio by 40%. Its share price rose 19.7% over the year. The trust's performance was also boosted by a lack of exposure to UK retail property, which performed poorly on the whole.

This is a very short period of time over which to judge investment performance though. Over the longer term the trust has done well. Since Phayre-Mudge began managing the trust in 2011, it’s done much better than the broader European property market. Remember past performance isn’t a guide to future returns. The value of your investments will fall as well as rise so you could get back less than you invest.

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2020. Figures shown with income reinvested.

Declared dividends totalled 14p per share for the year, an increase of 3.7% over the previous year. However some companies held in the trust announced dividend cuts or suspensions towards the end of the period in review.

The managers have been cautious towards dividend pay-outs in recent years and built up a healthy level of revenue reserves. These will be used to supplement short to medium-term falls in income from the underlying investments. Remember, dividends are variable and not guaranteed.

Find out more about this trust including charges

TR Property Investment Trust key investor information