Property funds make millions from cash fees

Property funds make millions from cash fees

UK property funds are making millions from charging a management fee on the cash holdings in their funds.

Financial Adviser's analysis of Morningstar data showed the industry could be making up to £16.2m from the practice, despite no actual fund management being required for this part of the portfolio.

The issue stems from the funds' daily liquidity option, which allows investors to withdraw their cash at a day’s notice. 

Open-ended property funds have little liquidity with which to meet redemptions from clients because buildings, regardless of underlying market conditions, take time to sell.

But all 16 funds in the IA UK Property Direct sector offer daily liquidity, which means they allocate as much as 20 per cent of the fund's assets in cash or cash-like instruments, as a buffer against a rush of investors seeking to withdraw funds, as was the case after the Brexit referendum in June 2016 when several funds were suspended.

Data from FE Analytics out last week showed the proportion of cash held in UK property funds doubled from 10 per cent to 20 per cent between January and June 2019. 

And the funds charge a management fee on this holding. The total assets of the funds in the sector was £11.1bn as at June 17, with the median fund being £931.5m in size, and the average management charge being 0.75 per cent.

Among the largest funds in the sector is the M&G Property Portfolio, which has assets of £3.1bn, and just more than 10 per cent of that is held in cash. 

The £2.4bn Janus Henderson UK Property fund has more than 20 per cent in cash and charges the asset management fee on all of the portfolio, not just on the part actually invested in property.

A representative of M&G said this was because the cash element was to provide liquidity and liquidity had to be managed, so the fee was justified.

Representatives of Janus Henderson Investors and Aviva Investors also confirmed the fees on cash for the same reason.

A representative of Columbia Threadneedle said: "The cash position is an important aspect of the entire workings of the fund. It provides liquidity. It also provides the fund manager the ability to find the best assets, as well as an opportunity to reinvest in existing assets."

Financial Adviser examined all 16 funds in the sector, and looked at the primary share class, which is the one advisers can typically buy for their clients. In compiling the data we assumed all of the funds in the sector levied the management fee, as none of those we contacted told us they do not. 

The data shows that, based on fund sizes and charges on June 17, the funds were making £16m from these charges.

James Sullivan, multi-asset fund manager at Miton Optimal, has concerns about the charges levied on investors.

He said: "The investor is being made to pay for the privilege of a flawed concept. Hypothetically, a 5 per cent allocation to a fund in this space may only be giving the investor 4 per cent exposure to the asset class they have selected, therefore an AMC of 0.75 per cent is actually a grossed up fee of 0.9375 per cent on the invested portion of the portfolio.