Property is a physical asset with secure income streams, which over the long term should provide returns for investors comparable to both bonds and equities, while tending to demonstrate both lower volatility than these mainstream asset classes and lower correlation to them. As such, property can be an attractive addition to an investor’s portfolio, in terms of risk-adjusted returns and as a diversifier for a balanced portfolio of investments.
The appropriate vehicle the properties sit in, whether open-ended or closed-ended, is often driven by the type of approach the fund manager is taking. In turn, each investor’s choice of vehicle and investment approach is likely to be driven by the needs and wants of each investor.
Generally speaking, a straightforward, lower-risk investment strategy, directly investing in a transparent and well-regulated market, such as the UK for example, can operate reasonably well within an open-ended fund structure. The open structure of these funds works particularly well for regular savers, in Isas or personal pensions, for example.
Despite the temporary retail fund suspensions following the EU referendum last year, long-term investors looking for exposure that reflects the experience of directly investing in UK property assets should expect these funds to continue to provide the returns and diversification they seek from the asset class. However, as with most investments, the key will be a long-term investment horizon, particularly given the inherent illiquidity of a physical asset.
In light of the post referendum stress and the financial crisis of nearly a decade before, investors needing greater confidence regarding immediate liquidity might prefer a closed-end structure, listed on a stock exchange.
However, investors in these need to recognise that they will not see the same return profile as a directly invested, open-ended fund – even one using an identical strategy. Listed closed-end funds will reflect broader market sentiment from time to time, leading to higher levels of volatility and a greater correlation to equity markets, at least over the short-term.
Sector and strategy-specific funds – retail warehousing or property developments, for example – are often in closed-end funds. Higher risk strategies are better suited to closed-end funds, to give the fund managers the stability of capital that is usually required for such approaches.
Closed-end funds often incorporate an element of gearing too, which is also better suited to such fund structures. Closed-end funds often have a limited life and can either be listed on a stock exchange, to provide liquidity or unlisted, where investors are likely to have to be comfortable with little or no liquidity, perhaps locked-in until either a specific liquidity event occurs or the fund winds up.
John Cartwright is chief executive of the Association of Real Estate Funds