InvestmentsFeb 26 2019

Have property funds learned lessons from 2016 gatings?

  • Learn about the recent troubles for open-ended property funds
  • Gain an insight into property fund performance
  • Be able to the describe the FCA's solutions to the sector's woes
  • Learn about the recent troubles for open-ended property funds
  • Gain an insight into property fund performance
  • Be able to the describe the FCA's solutions to the sector's woes
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Approx.30min
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CPD
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Have property funds learned lessons from 2016 gatings?

So what is the solution? One answer is investment trusts holding physical property, but such structures don’t lend themselves well to the model portfolios increasingly favoured by advisers. As a result, others are favouring a hybrid approach. 

Data from our sister publication Asset Allocator – a newsletter for discretionary fund managers – shows that many DFMs combine bricks-and-mortar open-ended funds with those that buy property equities. Some providers offer such a mixture in a single fund: the BMO Property Growth & Income fund, for example, holds around a quarter of assets in physical property, with the rest in shares.

Notably, this mix would allow it to escape the FCA’s new rules requiring immediate fund suspensions: this stipulation, as currently proposed, would only apply to strategies that have at least 50 per cent of their portfolio in physical assets.

Standing firm

Amalgamated approaches don’t always provide the best returns, however. The BMO fund does not appear in Table 1, which shows the best performers over the past five years. We have broken the data into two halves, aided by the IA’s recent decision to do the same with its Property sector.

The trade body now runs the UK Direct Property grouping, home to those open-ended funds that buy physical assets, and a Property Other category that is largely made up of funds investing in real estate securities. To these, we have added investment trusts from the Association of Investment Companies’ main UK property sectors.

The table clearly indicates that many of these trusts have trumped their open-ended rivals over the past half decade, not least because they have not been subject to the kind of price swings that re-emerged in December. Of the 10 best-performing Direct Property funds, just two are from the open-ended sector. They are L&G Property and Royal London Property – the latter of which offers monthly rather than daily dealing. 

The sector average performance for 2016-17, at just 1 per cent, underlines how gatings, price swings and dilution adjustments took their toll on the average open-ended fund over this period.

Unit trust and Oeics’ struggles have left the way clear for more idiosyncratic investments to take the top spots. Although the two funds run by Standard Life Aberdeen – SLI Property Income Trust and SLI UK Commercial Property Reit – are traditional real estate strategies, the remaining six trusts are quite different.

As their names suggest, three – Primary Health Properties, Medicx and Target Healthcare Reit – focus on primary healthcare properties – ranging from GP surgeries to the likes of care homes. 

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