Legal & General’s Justin Onuekwusi has placed his chips on bricks and mortar, taking his property exposure to its limit as he anticipates strong returns from the asset class in 2014.
The manager of the group’s five-strong Multi-Index range, which marks its one-year anniversary this month, said: “From a risk-return perspective, commercial property really is a stand-out asset class for us. I am expecting strong double-digit returns for 2014.”
While UK commercial property capital values have been on the rise since the middle of 2013, Mr Onuekwusi says “more importantly we’ve started to see rental growth rise as well”.
The manager gains access to the sector via the Legal & General UK Property fund, one of the few actively-managed funds in a range that is largely dominated by passive funds.
The asset class makes up some 9 per cent of the group’s lowest risk Multi-Index 3 and 4 funds, while the Multi-Index 7 portfolio, the highest risk fund, carries a 5 per cent allocation.
Mr Onuekwusi pointed out that since 2009, the London market in transaction terms has moved up almost in a straight line, and last year regional transactions also started to pick up again.
But he added that, given the inherent liquidity issues surrounding commercial property, the sector is now at the maximum across the five portfolios.
Mr Onuekwusi said: “The most scope for cyclical recovery in values is ex-London. Since 2009 there has been a strong recovery, but we are still way off where we were in 2006, especially from a regional point of view.”
Another big change across the suite of funds since inception, according to Mr Onuekwusi, was the introduction of global bonds, an event which occurred fairly swiftly after launch.
He said: “Traditionally defensive funds have a large allocation to gilts, but given the yields were at such low levels, we thought it was important to diversify. It is really important to spread the risk.”
His most recent move, however, has been to hedge out the yen exposure on Japanese equities and hedge out the US dollar exposure on emerging market debt. “In our bond exposure we felt currency volatility would continue,” he added.
While Mr Onuekwusi is “positive on the world” overall, he anticipates further volatility as interest rates rise and quantitative easing diminishes.
He acknowledged that UK interest rate volatility has picked up and that a rate rise is now priced in before the end of the year.
Mr Onuekwusi said: “Equities have consistently corrected some 8 per cent around the first rate hike. We expect this effect to be more pronounced now given the market’s addiction to zero interest rates.”
