Open-ended property funds caution

Investors who cannot afford a decent spread of individual property investments should avoid the commercial sector, claims Tritax, a specialist firm.

Anthony Wyld, the head of marketing at the group – which manages £2 billion in commercial assets – says while there are talented managers running open-ended property vehicles, the influence of fund inflows and outflows means they are not in control of their own destiny.

Wyld ran open-ended funds at Close Brothers but urges investors to spread assets across individual investments instead, where groups perform greater due diligence on the attractions of specific properties. (article continues below)

“Parts of the commercial sector offer opportunities, especially if act-ively managed,” he adds. “But collective funds adapt their acquisition strategy to reflect inflows, which often means buying property regard-less of whether it offers good value.”

Wyld says individual investment schemes are only suitable for higher net worth investors but says they can offer opportunities based on market circumstances.

“On open-ended funds, the strategy is largely determined by inflows and redemptions and retail invest-ors are typically behind the curve, influenced by general trends. This means managers can be forced to sell their best properties into a falling market and buy them back at inflated prices when retail de-mand picks up,” he says.

Wyld advises a spread of at least seven individual investments to capture different themes. “Open-ended funds involve huge additional risk, whereas the listed property market can produce solid returns if you time it well but means adding equity variables to a property investment,” he says.

This comes as property re-entered the top five selling fund sectors in June, despite its lowest rate of monthly change – 0.47% – since the market turned in August 2009.

But Marcus Langlands Pearse, the manager of the Henderson UK Property fund, says these are a tired set of arguments against open-ended portfolios, which offer the best way of achieving a well-diversified commercial portfolio.

“Property funds went through the biggest correction in the sector since the 1970s from 2007 to 2009 and all the onshore vehicles remained open despite heavy redemptions,” he adds.

Looking at his own portfolio, he says investors can access an £800m fund with broad geographic, tenant and sector spread for as little as £100 a month.

He dismisses accusations that retail funds are driven by inflows, highlighting his current 20% cash position.