TR Property 27 July 2022
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To maximise total returns by investing in pan-European equities and UK direct property, focussing on long-term capital and income growth.
Marcus Phayre-Mudge and Alban Lhonneur
Association of Investment Companies (AIC) Sector
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TR Property (TRY) invests in the equity of property companies, offering exposure to the growth and income in the property market with far greater liquidity – and therefore flexibility – than a direct property portfolio would offer. The trust is pan-European rather than restricted to the UK, which means that its manager Marcus Phayre-Mudge has a broad opportunity set and can build a highly diversified portfolio. Additionally, commercial rent in Continental Europe is much more commonly index-linked than in the UK, meaning the trust’s revenue and capital values benefit from some protection in an inflationary environment.
Marcus has made full use of the flexibility that investing in equities has afforded him in recent years, which have been highly volatile. As we discuss in the Portfolio section, he has been able to tactically shift in and out of sectors during different phases of the pandemic and after Russia invaded Ukraine. Notably he has been adding to the portfolio in recent weeks and Gearing has ticked up, indicating that he thinks the sell-off in the market has revealed some value.
The index-linked nature of the underlying income (over 60% has some form of inflation linkage) should help support the revenue account in the coming months and years. The trust has paid an uncovered Dividend for the past two years as revenue fell due to the pandemic, but the board and manager remain confident that this cover can be repaired in the near future. TRY has grown its payout in each of the past two financial years, in contrast to the direct property sector where almost all trusts cut their payout due to the pandemic.
Index-linked income is hard to come by, and in the current environment, with UK and eurozone inflation at multi-decade highs, we think the high level of indexation (over 60%) on TRY’s portfolio is attractive. It is true that the pass-through will not be 100% as contracts typically include step-ups at agreed intervals, plus some of the contracts are indirectly linked (in Germany), but nonetheless this feature should give strong support to the income generated and make it easier for Marcus to generate real income growth. Indexation is also likely to provide support to capital values, even if we do enter a recession.
Over the long run we think the flexibility of the portfolio is a key advantage, and Marcus has a good track record of using it to add value in volatile times. It is striking that Marcus has been adding to his market exposure in recent weeks and gearing has picked up. While he acknowledges the near-term risks, this indicates he thinks there is good value in the market – we note how it compares to the financial crisis period, when Marcus took cash up to nearly 20%. Marcus’s tilt to less indebted companies and his focus on those in sectors with favourable supply-and-demand dynamics should help provide some support in an environment of rising rates and weakening economies.
- More diverse portfolio than its direct property peers and greater tactical flexibility
- Strong track record of alpha generation
- High level of index-linked income on underlying portfolio
- Lower historical yield than the direct property sector
- Property shares more correlated to equities than direct property is over the short term
- Most property sectors have some economic sensitivity