Property fund investors have experienced a rollercoaster ride over the past 15 years. Initially buoyed by years of storming growth at the start of the millennium, the situation turned sour in 2008 as the global financial crisis derailed that progress.
Overturning years of growth came at a particular cost for investors in open-ended property Oeics and unit trusts: managers supposedly providing daily dealing could not meet demand with sufficient cash, leading to several funds suspending dealing.
A recovery in valuations followed, only for another round of suspensions to take place in 2016 following the European Union referendum. The fund gatings proved to be short-lived this time around, but the episode has resurrected questions over the suitability of these portfolios for retail investors and advisers.
When it comes to property, the argument for unit trusts over investment trusts looks increasingly shaky. The latter group do not promise daily liquidity to investors – a decision that appears to be wise given the inherent illiquidity of the asset class. Properties take time to sell, but fund investors tend to do so en masse.
Even open-ended portfolios holding 20 per cent cash were forced to suspend trading last summer. The move was triggered by the Brexit vote, but the clues were there for investors. According to Investment Association (IA) data, during January and February 2016, a net figure of £140m was withdrawn from property funds and, despite seeing net inflows of £3m in March, the total of £520m leaked in April and May signalled fragile confidence.
A number of managers pointed to a rich run of performance that had potentially reached its peak, with other asset classes offering more favourable valuations.
The FCA is reviewing property fund practices in light of the events of July 2016. But many fund buyers are not calling for reform: discretionary fund managers prize daily dealing over most other qualities, and many say last summer’s suspensions showed the system works.
A recovery in values has helped bolster their arguments: the five and 10-year performance figures for most open-ended and closed-ended funds still stack up well. This is despite the IA and Association of Investment Companies (AIC) groupings being home to all manner of different property investment styles.
With regards to the open-ended space, the IA states that in order to qualify, funds should invest at least 60 per cent of their assets directly in property or at least 80 per cent of their assets in property securities.
Alternatively, a hybrid fund can be created when direct property holdings fall below 60 per cent of the threshold for six months or more, and the balance is invested in property securities to ensure an 80 per cent property weighting.
The situation with trusts is more segmented, with the AIC sectors spanning five sub-categories: Direct Asia Pacific, Direct Europe, Direct UK, Securities and Specialist.
For comparative purposes, Money Management has grouped funds and trusts together to identify the top performers, but this does come with a caveat.
As funds and trusts can vary wildly in geographical, volatility and strategic terms, returns can be disparate. Some managers opt for consistency whereas others take a more racy approach.