Physical property funds have been included in the “approved list” of portfolios from FE for the first time after the ratings agency opted to rank such portfolios by their income-generating qualities.
FE’s rankings, previously known as the Select 100, had until now excluded physical property funds because of what it described as the “difficulties in rating them using a pure quantitative approach”.
This was also the reason behind the company’s 2014 decision to not award crown ratings for physical property funds.
However, the firm has now added funds from M&G, Columbia Threadneedle, F&C and Time Investments to its approved list, using a methodology that shies away from a focus on capital growth.
The rationale behind the approach addresses the fact that appraised values of properties can “greatly distort the performance and behaviour of [property] funds,” said Rob Gleeson, head of FE Research.
“To combat this, the FE Research property recommendation is based on the income that the fund produces over and above the capital appreciation, as this… is more stable, measurable and is the most attractive characteristic of the asset class,” Mr Gleeson added.
An eligible fund was analysed using a quantitative analysis of income and its stability over time, said Mr Gleeson. This was followed by a qualitative assessment of future income distribution, looking at factors such as average lease lengths and tenant risk ratings to form a view of potential risks to rental distribution growth.
The ratings provider’s approved list of funds now includes the £4.6bn M&G Property Portfolio run by Fiona Rowley, Don Jordison’s £1.2bn Threadneedle UK Property fund, the £279m F&C UK Property fund managed by Julian Smith and Guy Glover, and the £231m Freehold Income fund run by Nigel Ashfield and Stephen Daniels.
“The four funds that made the cut stood out due to their income track records right from the start and we believe their different investment processes make this repeatable,” Mr Gleeson added.
Addressing the most positive features of each portfolio, FE singled out F&C’s fund for its nimble size, while Freehold Income was praised for charging fees on capital rather than income. The M&G portfolio’s opposite policy counted against it, but the ratings agency said the fund’s decision to diversify away from London stood in its favour.
The Threadneedle fund, meanwhile, was praised for its focus on smaller lot sizes.
Over the past three years the M&G fund has produced a total return of 29.5 per cent, while the Freehold, Threadneedle and F&C funds returned 29.3 per cent, 27.8 per cent and 20.5 per cent, respectively.
FE’s analysis excluded funds with non-physical exposure to the asset class, as well as institutional funds and those with short track records.