The funds underlying Prudential’s pensions business are increasingly moving assets out of the UK as the firm seeks to re-position itself for the years ahead.
Prudential Portfolio Management Group (PPMG), the firm carrying out the underlying research for the Pru Fund range, said it expected increased market volatility going forward and part of its diversification process was to reduce UK assets in equities, property, and fixed income.
Product specialist at the firm, Mark Riggall, told advisers at a Prudential seminar on 7 February M&G Real Estate had sold 14 assets in the past six months to get the UK property portfolio “in a shape which is fit for purpose”.
He said: “We’ve sold quite a few smaller, lower quality high street retail assets, we are looking to have more quality assets in our portfolios in the UK with international appeal and the ability to withstand what is a trend within the retail space - that our economic drivers for retail are changing."
Mr Riggall said retailer John Lewis had told it footfall in some of their shops had dropped up to 50 per cent because people were shopping online.
While this made commercial property, such as warehouses, increasingly attractive, high prices and uncertainties around Brexit, which could see UK commercial property drop by as much as 20 per cent under severe circumstances according to the firm, meaning PPMG was looking elsewhere for investable assets.
Mr Riggall said: “We have a big European property team at M&G and we have a US team.
“We [as consumers] are behind the States with buying things online, the Europeans are behind us - we don’t want to buy logistics warehouses in the UK now that are too expensive but we can go into Europe and do the same thing there, we can even build them.”
Despite this, and after a strong last year with commercial property delivering about 10 per cent in returns, Mr Riggall thought it was unlikely the firm would see much of a return on its investments in this space this year.
“Going forward you are likely only to see a return from the income you are earning on this commercial property this year, not a lot of capital uplift,” he said.
Commercial property funds slumped in price following the Brexit vote in June 2016 as investors panicked and cashed in their investments.
A number of large property funds were suspended, as providers sought to stem withdrawals and protect the remaining investors from falling share prices.
But a year later figures showed the asset class was still key in diversified portfolios.
Bur Mr Riggall said: “As an asset class, commercial property has proved resilient since the EU referendum result. Despite its illiquid nature it has a low historic correlation with other asset classes is still offers an attractive yield premium over gilts.”
He also did not think changes announced in the November Budget, which said those selling commercial property will not be allowed to use indexation to mitigate their capital gains tax liability, would have any big impact on the business.
He said: “Our modelling of the change on our property portfolio shows that its impact will be gradual and will not materially increase the amount of tax paid by the with-profits fund in the short term.”
carmen.reichman@ft.com