At a time when the outlook for equities is clouded by indifferent economic news and bond markets are waiting to see if the US Federal Reserve Bank finally moves interest rates up, it makes sense to take a look at alternative assets.
Property has had a tough time recently, other than domestic residential property, which continues to defy gravity, so perhaps a case exists to consider it on diversification grounds alone. The trouble is, though, that property covers a variety of options with widely differing characteristics.
Aside from the fact that different segments of the property market will behave in different ways, there is also the option of building a portfolio through buying physical property direct or through the shares of property investment companies. As property shares do not necessarily perform in line with their underlying assets, this can create an issue for those tasked with evaluating the most appropriate vehicle to select for an investor.
Remember, too, that the range and type of property available is very varied. Office blocks, shopping centres, distribution depots, warehousing and storage facilities – all are quite legitimate property assets and while they will share characteristics, it does not automatically follow that they will perform in line with each other. Fashion can play its part here, too, so the business of making a choice is far from easy.
There is also the issue of whether to access this asset class through a closed ended or open ended route. While property arguably lends itself to a closed ended structure as the underlying asset can suffer liquidity issues, the way in which gearing has been employed in some property trusts highlights the greater risks that can exist.
Looking at the performance of both open ended and closed ended vehicles does not make the choice any simpler. The best performing investment trust, TR Property managed by Thames River, has recorded a modestly better five year return at 115 per cent than the leading open ended fund, Aberdeen Property Share at 104 per cent. Part of the difference could, though, be accounted for by the way in which the performance figures are calculated.
F&C is another investment manager with a foot in both the open ended and closed ended camps. Its Real Estate Securities fund is a consistent performer, though it has slipped a little in the six months table, shedding 0.5 per cent to remain in the second quartile. Its Commercial Property and Real Estate investment trusts also show up well in the longer timeframe tables, both nearly doubling over five years. Progress over six months has been more pedestrian, though both are in modest positive territory.
The Hearthstone Residential Property funds are worthy of a mention. I recall their launch and find it remarkable that they now have a three-year record. Their two funds top the short-term tables, though the three year numbers are less impressive, with the main fund delivering 25 per cent and coming in at number 23, and the feeder fund trailing a little.
There are in the open ended tables funds specialising in UK, European, Asian and global property, as well as student accommodation. Many rely on their exposure through buying Real Estate Investment Trusts, but there are others where direct investment is facilitated through feeder funds or the existence of large segregated property investment portfolios elsewhere in the organisation. Life companies feature prominently, as you might expect, and there are few boutique operators in this sector, though the closed ended range has more than a few.
The closed ended sector divides property into five sub-sectors. Direct investment accounts for three of these – UK, Europe and Asia Pacific. The other two are Property Securities and Property Specialist. The two investment trusts in this latter sub-sector focus on medical and healthcare, with Target Healthcare relatively new – it was launched in March 2013. TR Property, in contrast, has been around in one form or another for over 100 years.
But it is always important to remember that investment trusts can prove more volatile than open ended funds. Aside from the gearing issues, which should work to the advantage of investors in a rising market, the shares’ ability to fluctuate against the value of the underlying assets, sometimes standing at a premium in the case of many well regarded property investment trusts, must be taken into account. This is not a sector to be ignored, but nor is it easy to evaluate.
Key Takeaway: Determining how best to access this asset class is not an easy call. Property covers a variety of options with very different potential outcomes. Nor is the choice between open or closed ended vehicles straightforward. But a well managed property fund will broaden the diversification of a portfolio, so good research into the sector should pay off.