Are open-ended property funds unsuitable for retirement?

This article is part of
Guide to using property to fund retirement

“Importantly, capital growth is continuing in 2017 and we expect strong returns in the second half of the year, with total returns being 6-7 per cent,” he forecasts.

“So if an investor is looking for long-term steady income at over four times the gilt yield and twice the income from corporate bonds, together with a low level of volatility even in challenging times, property seems to fit the bill nicely.”

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Suitability for later life

But then a property fund manager would say that, wouldn’t they?

Kenneth MacKenzie, managing partner at Target Advisers, suggests: “As always, investors should seek the advice of a financial adviser when considering suitability for a given aim.”

But he agrees as part of a balanced portfolio, commercial property can deliver returns appropriate to the risk. 

“The funds which were more sensitive to the referendum reaction were those exposed to the retail and Central London office markets, as well as those more heavily weighted to development activity,” he adds.

Ultimately though, Mr Glover believes these types of funds are still suitable for those saving for later life.

As he notes: “Many of the underlying investors in the F&C UK Property fund are retirees, as their advisers know and appreciate the benefit of a core property holding which invests in quality assets throughout the country. Secure long-term income with steady growth is what we seek to achieve from a balanced and diversified portfolio, spread throughout the UK.

“An allocation to property would seem to work for retirees as it provides diversification away from the low income return of some other asset classes and less volatility than the equity markets.”

As the FCA points out in its review of property funds and liquidity risks, advisers did manage to shield their clients from much of the impact of the suspensions.

It states: “Wealth managers and financial advisers were well prepared for the suspensions. Given the diversified nature of their portfolios, the suspensions had little impact on clients.”

Cash is king?

There is still the issue of liquidity though, with Ian Sayers, chief executive at the Association of Investment Companies, noting, “many open-ended funds are holding substantial amounts of cash to provide protection against redemptions, sometimes as high as 25 per cent or more”. 

He points out this is particularly relevant for income seekers, as such balances will be earning very low returns.

This may not be of too much concern to longer term investors though. As Mr Moore points out, managers of open-ended property funds hold high levels of cash for a reason.

“While holders of daily dealing open-ended funds typically receive redemption proceeds within a week of selling their units, it can take a property manager months to sell an asset due to the amount of due diligence involved. Given the mismatch, most funds will hold large amounts of cash to meet client outflows,” he says.