Revealed: Wealth managers’ property fund favourites

Wealth managers have been shifting assets out of fixed income and into property as the unloved sector comes back onto investors’ radar.

In an environment where there is little value left in some parts of the fixed income market, investors have been looking to property for an alternative source of yield.

The latest figures from the Investment Management Association (IMA) show flows into property funds have recently rebounded.

Net retail sales of property funds hit £123m at the beginning of July, the highest level since July 2010, when sales peaked at £147m.

The IMA Property sector returned of 20.1% over the three years to 9 August, and 7.2% over one year, according to Morningstar. In comparison, £ Strategic Bond produced 20.1% over three years and 6.5% over 12 months, while £ Corporate Bond returned an average 18.6% over three years and just 4.4% over the last year.

Wealth managers have been scouring the market for the best property offerings as they look to reallocate client assets away from bond funds, and the largest portfolios in the market are attracting their attention.

Eric Parker, investment manager at Equilibrium Asset Management, said he plans to move roughly 5% of his allocation from fixed income into property, taking bond funds down to 23% of the portfolio.

The new 5% allocation will go towards the Henderson UK Property fund. Parker already has 5% in the £2.2bn SWIP Property trust and 5% in Ignis UK Property fund, which has almost £1bn under management.

“Bonds will dip here and in the near future,” Parker said. “The economy is picking up and bonds will fall because they have had such a good run over the last three to four years.”

However, he warned property funds are not risk free, and selling out of the asset class can sometimes be difficult. In 2008, property prices dropped dramatically and some funds were forced to impose exit restrictions due to liquidity problems.

Several high profile property funds fell victim to liquidity issues during the crisis, with many suspending redemptions and some closing for good, including Aviva Investors’ European Property fund and New Star’s International Property fund.

More recently, firms operating in the student property market have struggled, with Opal Group going into administration in March and Brandeaux suspending its eight-strong fund range in July as it tried to meet redemption requests.

“Obviously, property falls with the economy, and if you want to sell out of a fund, liquidity risk could lead to it being hard to sell,” Parker said.

Meanwhile, Ian Brady, chief investment officer at OakTree Wealth Management has moved from zero exposure to property funds to a 6% position in £2.2bn M&G Property Portfolio, managed by Fiona Rowley.

“A combination of yield differential being narrowed, real economy improvements and better value than bonds and cash are contributing factors,” he said. “The M&G Property Portfolio has a very low void rate – under 3%, against the market rate of 8%.”

To fund the move, Brady has reduced his portfolio’s allocation to corporate bonds by 3% to the lowest possible level.

New allocations to property funds are also under consideration from wealth managers Canaccord Genuity and Whitechurch Securities.

Nigel Cuming, CIO at Canaccord Genuity, said he is looking for a liquid way to access property funds’ attractive income stream, in an effort to maintain a cautious investment approach.

Ben Willis, head of investment research at Whitechurch Securities, said he expects to branch out into a new property allocation over the coming months.

“There will come a time, as the UK recovery continues, that we will put our allocation up, probably from its current 10% to 15%, depending on the performance of other asset classes.”

Whitechurch already allocates towards the Henderson UK Property fund and the M&G Property Portfolio.

Gavin Haynes, managing director at Whitechurch Securities, named a less well recognised property fund as one he has been looking at – the Hermes Property unit trust.

“Size matters when it comes to property investing and we prefer large liquid funds from established providers,” he said. “There are many esoteric property funds available, but our own preference is to focus on investing in funds that invest directly in good quality properties within a UK regulated unit trust /PAIF structure.”

“As well as our existing holdings, SWIP, Ignis and Threadneedle are all established UK funds that we monitor closely,” Haynes added. “The one fund that is not so well known that has recently come onto our radar is Hermes Property unit trust.”

First published in Investment Week,  23 Aug 2013 Ruth Gillbe

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