Legal and General Investment Management is set to overhaul its UK property fund amid pushback from investors and the regulator around liquidity issues plaguing the sector.
Under the new structure, LGIM will adopt a “hybrid” approach: 45% of the portfolio will be held in direct property, with 45% reallocated into shares of globally listed real estate investment trusts. The remaining 10% will be held in cash.
Michael Barrie and Matt Jarvis will remain as lead managers of the £1.2bn L&G UK Property fund, one of the few left standing in the sector following a wave of suspensions and liquidations in recent years.
Investors have soured on daily-dealing UK property funds as concerns mount over whether these open-ended structures provide appropriate liquidity for the asset class.
Funds across the sector have seized up during times of market stress, including after the Brexit vote and during the onset of the Covid pandemic, when it became difficult to value real estate.
Rival M&G axed its £565m UK property fund last October due to waning interest among investors and persistent outflows. St James’s Place suspended its £924m property fund the following week, citing similar reasons.
Many fund houses have been sitting on large cash positions to ensure investors can redeem their holdings in a timely manner. L&G UK Property’s cash allocation was as high as 18% last year.
Meanwhile, new fund structures have also reached the market, including long-term asset funds, which are specifically designed to invest in less-liquid assets such as property.
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Oli Creasey, property research analyst at Quilter Cheviot, said LGIM’s decision also appears to be a direct response to an ongoing Financial Conduct Authority consultation regarding daily-dealt property funds.
L&G UK Property now falls outside the scope of the consultation, which looks at funds with 50% or more exposure to direct property, and means it would be exempt from potentially implementing three-to-six-month redemption periods.
“There is no perfect way to provide liquidity without volatility in a sector where the underlying assets are fundamentally illiquid, but we feel the hybrid approach generally provides the best of both worlds,” Creasey said.
Shareholders will vote on the suggested changes to the L&G UK Property fund on 10 April 2024.
James Crossley, head of UK wholesale at LGIM, said: “We believe that these suggested changes to the fund are in the best interest of investors and recommend that they vote in favour. As a property sector leader for more than 16 years, we are well-positioned to continue providing balanced property exposure to investors.”
“Relative to other asset classes, we feel that the UK property sector remains an attractive diversifier in any balanced portfolio, and is well-positioned for investors with long-term horizons,” he added.
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To contact the author of this story with feedback or news, email Kristen McGachey
