Two recently unveiled funds are the first to tap a growing pensions sub-market, writes Jane Roberts
FSA-approval, daily pricing, unit accumulation, high liquidity, low volatility: these are all desirable, if not essential for investors and managers of defined contribution pension schemes when they invest contributions. Such contributions are predicted to grow like topsy. Pensions consultant Towers Watson says eight out of 10 FTSE 100 firms give DC pensions to new employees rather than defined benefit schemes.
With the start of ‘auto-enrollment’ next year, companies without pension schemes will be required to start DC schemes and make contributions, with staff having to opt out rather than opt in. Estimates of the potential growth of this market vary hugely, but are in the many billions of pounds. Property fund managers know that if they are to manage a slice of this, they need to package property to suit.
That is “a hard nut to crack”, says Nick Preston of CB Richard Ellis Investors, one of two property investment managers to announce this month that they have DC property funds up and running. CBREi spent five years planning the strategy, the last three in talks with the FSA and pension businesses, and on structuring the vehicle, called simply the UK Property Fund.
CBREi manages the property portfolios of 27 defined benefit schemes and has a very successful traditional segregated mandate business, but knew it had to think ahead. Preston, fund manager for the new product, stresses: “DC is the future for the market.”
Legal & General Property, meanwhile, launched the Hybrid Property Fund for DC pension schemes with parent Legal & General Investment Management. Mike Barrie, LGP’s director of balanced funds, says LGIM had seen “DC investment double in the wider pension business in two years, and in real estate it has doubled in five years.”
Providing an entry route
He says real estate’s growth was slower because the industry had not been “providing the route of entry that was needed”. Preston agrees that most fund managers “have never pushed it, and consultants have tended to keep a fund structure of equities and bonds, not including property funds, partly because the products are not there. We want to offer the benefits of property and our strategic investment to DC investors.”
LGP business development manager Pete Gladwell says Hybrid and another new LGP product, its inflation protection fund, were “led by clients”. Hybrid was developed through months of talks with an investment consultant that received a year’s exclusivity in return. Now that is over, an external life firm has picked the fund for its DC clients. “Consultants struggle with how to get liquidity from property”, Gladwell says. “One of the rationales for the life insurance company was that all of our underlying funds stayed open during the downturn.”
CBREi feeds DC appetites
Structured as a tax-efficient property authorised investment fund (PAIF), CBREi’s UK Property Fund has a dedicated feeder fund for DC investors. The property portfolio will be built from scratch with £10m of seed capital from parent CB Richard Ellis’s balance sheet. This will be invested in REITs, but Nick Preston (pictured) and his team will buy core assets as external cash comes in.
The fund has been added to Fidelity International’s UK platform, which administers £36.2bn in assets. The fund can take in direct property portfolios from mature defined benefit schemes looking to exit property via the fund’s liquidity. CBREi is in talks “with an existing, middle-sized client fund, about reversing into the fund”, Preston says.
Some 80% will be held in direct assets. Preston says between 15% and 20% of that 80% could be held as assets worth around £1m that could be quickly sold at auction to manage liquidity. The rest will be invested in REITs and cash. The target return is 4-5% net.