Protego and Threadneedle create £400m combined fund

Two of the leading institutional property fund managers, Protego and Threadneedle, are merging their UK funds to provide greater scale and liquidity for investors.

In a rare move among UK property funds the Protego UK Property Fund is to be merged with the Threadneedle Property Unit Trust to create a £400m fund with more than 100 properties.

The rationale for the merger is that a combined fund will provide investors with a larger and more widely diversified portfolio, a lower aggregated total expense ratio and enhanced liquidity for investors. Threadneedle Property Asset Management will manage the combined fund.

The Protego UK Property Fund is a small, open-ended fund that has 15 properties valued at £61m. The fund has been subject to several redemptions in the past year in common with other similar funds. Its positive underlying performance at the property level, combined with its gross distribution yield of around 5%, are both negatively impacted by the costs associated with running such a small fund.

‘Protego considered a number of prospective balanced UK commercial property funds as candidates for a merger,’ said Hugo Llewelyn, head of investment at Protego, who formed the fund manager with CEO Iain Reid and Charles Weeks in 2004.

‘Threadneedle Property Unit Trust was chosen as a result of its similar investment strategy to the existing fund, being a core, balanced fund, targeting a higher-than-average income return.

‘Merging the funds will protect the interest of existing fund investors, who wish to continue their long-term strategic allocation to property.’

Threadneedle PUT has been one of the top-performing UK balanced funds. In the year to 30 June it produced a return of -9.8%, which was the second best behind Royal London Exempt PUT of the 28 balanced funds measured by the Association of Real Estate Funds. Over the three-year period it generated a return of 7.2%.

Threadneedle’s head of property Don Jordison said of the merger: ‘We have found that in these challenging times, scale and liquidity are increasingly important factors for investors, as well as investment expertise and track record, when assessing their holdings.’

The merger has been welcomed by investors. Nick Cooper, CEO of ING Real Estate Select, an investor in the combined fund, said: ‘I would expect that the merging of smaller funds with larger funds will be a continuing trend within our industry.

‘Managers have a fiduciary responsibility to act in the best interests of their unitholders or shareholders at all times. It is a difficult decision for a manager, but provides an elegant solution for investors.’

Charles MacKinnon, managing director of Thurleigh Investment Management, also an investor in the fund, added: ‘As a wealth manager with a long-term strategic allocation to property, we applaud the approach adopted by Protego and Threadneedle in protecting the interest of investors’.