Hearthstone Fund

Ethical investing is a broad term and can have different meanings for different people, but the fund only invests in houses and flats which are mostly rented by individuals and families. Other than cash and cash liquidity funds, it does not invest in any other assets or companies. 

Hearthstone is committed to providing excellent accommodation and landlord services to its broad range of tenants. In a market where a significant minority of rented homes fail to meet Decent Homes Standards, we believe the fund meets an important social need.

The Fund’s Environmental, Social  and Governance (EG) credentials have resulted in it being awarded a 3-star ESG rating by 3D Investing, powered by Ethical Money. You can download the report here and you can find out more at www.3dinvesting.com.

No. All properties are purchased outright with cash. There are no mortgages on any of the properties, so the fund doesn’t risk breaching lending covenants.

Retail classes (PAIF classes A to D and the Feeder Fund) allow subscription and redemption on any UK business day. The retail classes are ‘non-complex’ for MiFID II purposes.

Institutional classes (PAIF classes E to G) can also be purchased daily. However, redemptions are restricted to the first business day of a calendar quarter, with 1 month prior notice to redeem class G, and 3 months to redeem classes E or F. The institutional classes are ‘complex’ for MiFID II purposes on account of their limited redemption terms.

As a PAIF, all of the fund’s income from property investment is exempt from corporation tax, which would normally be payable by an OEIC at 20%. This makes the fund very efficient for tax purposes and the investor is taxed upon the PAIF assets more or less as if they held those assets directly. This is particularly attractive for those investors holding the fund within tax-advantaged wrappers such as SIPP or ISA.

Although the unit trust feeder fund doesn’t have the same corporation tax exemption enjoyed by the PAIF, it can also be held in a SIPP or ISA.

See the prospectus for more detailed information on taxation within the fund and taxation in the hands of the investor. This can be downloaded from the library.

The team’s sell disciplines are essentially the opposite of their acquisition selection criteria. We will sell a property if we believe one of the following applies:

• it is no longer likely to produce sustained above average growth or provide an attractive yield
• it no longer represents a ‘best fit’ within the overall balance of the portfolio
• alternative stock is available in the same region that would exhibit superior return characteristics. 

As well as having access to good quality independent research, Hearthstone undertakes its own analysis and research for a combination of reasons:

• to address the particular needs of the fund and its investment strategy;
• to consider residential property investment in the context of the broader real estate market and financial investment markets;
• to plug gaps in the information available from other sources; 
• to assess the quality and accuracy of third party research; and
• to evaluate risks and to explore alternative investment scenarios.

We conduct both “top down” and “bottom up” research, focused where we believe it is most likely to add value.  For example, as the fund’s strategy is to invest nationally in locations with strong tenant demand, a starting point for identifying market opportunities is our proprietary “hotspot” analysis, which compares market structures and longer term prospects for private rented residential property in each UK local authority area.  This is a much more granular framework for investment decision-making than the standard national or regional market forecasts, and it specifically focuses on the dynamics of the private rented sector, which is the fund’s focus.

As well as property market variables (focusing on supply, demand and pricing indicators), our forecasts consider shifts in the demographic profile, local economic and employment prospects and developments in local infrastructure and community services.

Our hotspot analysis framework is used as a tool to assist with market selection, but our investment approach also needs to allow for the fact that every property asset is different: there will be poor assets in outwardly attractive markets, and potentially good opportunities in weaker ones.  Each potential or existing asset is considered on its own merits, in the context of its local market and broader investment trends.  Prospective purchases are subject to an initial screen to ensure that they conform to the fund’s stock selection criteria, with the strategy set out in the Investment Plan, and with the investment guidelines. 

In considering individual locations and investments, detailed “on-the-ground” research is undertaken to understand local investment and occupational market conditions, and what each area is like as a place to live.  Considerations include:

• letting and investment market supply and demand dynamics, 
• current and potential competition, pricing, 
• quality of social infrastructure and services, 
• expected tenant profile, 
• consumer attitudes, 
• local employment structure and prospects, major employers, accessibility, and travel patterns. 

We believe this approach leads to better-informed investment decisions

Yes. Many of the mainstream SIPP trustees already hold the fund.
TM home investor fund satisfies HMRC’s definition of a ‘genuinely diverse commercial vehicle’ (information on their website here https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm125400#IDANC0MD) and, as such, can be held in a SIPP without triggering unauthorised payment charges or scheme sanction charges.

The TM home investor fund buys flats and houses of various sizes, which are then rented to families, individuals and companies. The properties are spread across England, Scotland and Wales and broadly reflect the UK (excluding Northern Ireland) housing market in terms of regional distribution and property type but, as an actively managed fund, Hearthstone has flexibility to select only stock that is expected to positively impact the portfolio performance and increase the likelihood of outperforming the fund’s benchmark.

Properties are selected on a long term ‘buy and hold’ strategy, although the fund has the flexibility to divest under-performing parts of the portfolio, as well as scaling up others. Hearthstone favours new or modern properties to keep maintenance and management costs as low as possible, and chooses homes that will attract long-term tenants in strong performing rental locations with an active re-sale market to maximise investor returns.

It aims to hold at least 85% of the portfolio in residential property, with the remaining 10% to 15% in cash and cash liquidity funds in order to meet day to day redemption requests. All properties are bought outright with cash, so there’s no debt to service and no risk of breaching lending covenants.

The fund may temporarily deviate from the above allocations should investment circumstances dictate. PAIF investment and borrowing restrictions also apply and are outlined in the prospectus which can be downloaded from the library.