Dear Client,
For years Britain’s market for commercial property has been a favourite among local and overseas investors alike but there have been very few collective investments (outside life assurance and pension funds) available which facilitated investment in bricks and mortar and a couple more investing in property shares, the shares of companies which themselves invest in, or manage, real commercial property. The introduction of REITs (Real Estate Investment Trusts) in the UK (click here for our Bulletin Issue 4 for more details) and the availability of property funds as an ISA investment, has led to an increase in the number of funds on offer, although there are still only a few holding significant proportions of real property.
The inflows of money into these funds over recent months (particularly during the ISA season, as investors look to diversify away from equities) have tended to dilute performance somewhat as it has increased the potential for buying “sub-prime” property with the newly available cash, or has increased the proportion of the funds’ assets which remain on deposit.
After a strong run during the past few years, there is little doubt among the experts that commercial property is beginning to revert to a more traditional cycle. This does not mean that interest from buyers is on the wane. It means simply that in future the market is more likely to be influenced by fundamental considerations – namely the expected rise in rental income over the longer term – than it has been in the recent past.
The last week has seen developments in the Property sector with Norwich Union and New Star placing their property unit trusts onto what is know as a “bid” or “cancellation” price basis following similar moves by Standard Life (not including the Select Property Fund), Prudential, M&G (not including the Property Portfolio Fund), Resolution and Scottish Widows.
The effect is to reduce investors’ nominal fund holdings by 4% (New Star) and 4.72% (Norwich). Managers take these steps where there is net disinvestment from the funds – more money going out than coming in – creating a situation where property may have to be sold. The costs of selling the property are factored into the “cancellation” price.
Before this week's bid pricing move, fund manager Geraldine Davies and two of her colleagues announced their departure from Morley Fund Management, Norwich Union's fund arm, and transferred to Aegon Asset Management.
The fundamental reasons for including commercial property within a tailored portfolio of investment have not altered:
- Diversification – commercial property is a proven method in achieving diversification as it has a low correlation with returns from equities and bonds, and therefore helps smooth out investment returns.
- The potential for a steady income – property provides a relatively stable income. It has consistently yielded more than equities and bonds over the last decade, however past performance is not a guide to future performance.
- Low volatility – returns tend to be less volatile than those from equities. This is because rental income drives returns. Rental income has proved to be more stable because, generally, leases are long and rent reviews put rent up, not down.
- Tangibility – properties are a tangible asset, unlike equities or bonds. Even if tenants move out, the property remains an attractive resalable asset.
With the introduction of funds from investment houses with experience in property investment and management we have increased the number of funds on our panel within the commercial property sector and have looked to include funds which between them give a reasonable proportion of investment into bricks and mortar and provide global property exposure while retaining a concentration in the UK. Our belief is that to concentrate solely on UK real property does not now offer the diversification necessary in this sector.
Additionally, due to the departure of the management team, we recommend the sale of the Norwich Property Fund. We do not believe that the move to a “cancellation” price basis should affect fundamental long term investment decisions.
The six funds currently on our panel in the Commercial Property Sector are:
An investment spread equally across the six funds would result in the allocation of commercial property investment as follows:
There have been a couple of changes to the ratings of funds within the Tailored Asset Management selection.
US Equities Sector
We are recommending the replacement of the Gartmore US Opportunities Fund. Forsyth OBSR has recently withdrawn this fund’s A rating following an announcement that there will be a change of management from NWD Investments to Marisco Capital Management, a Denver based investment management firm to be followed by an overhaul of the fund.
Fixed Interest Sector
There are alterations to our “Buy List” in the fixed interest sector. We have replaced Standard Life’s AAA Income, M&G’s Strategic Corporate Bond and Norwich Union’s Corporate Bond funds due to a down turn in their OBSR ratings with the following two fixed interest funds:
If you hold any of the funds within a portfolio held on the Transact platform, we will contact you shortly in order to make the necessary alterations to your portfolios.
Over recent months we have been working hard to improve our process and are now able to rebalance by attaching a “template” to each pension plan which a client holds on the Transact platform. The “template” is selected using exactly the same criteria of personal asset allocation based on your attitude to investment and the investment term coupled with our fund selection process. It avoids us having to place individuals buys of up to twenty funds or, in the case of rebalances, place both the sale and buy orders. It also reduces the potential of human error.
I am delighted to say that this “streamlined” process is now in place for the majority of our pension clients, although it is not yet available for personal investments such as Individual Savings Accounts.
The major benefit to our clients will be that we will be able to rebalance your portfolio should it become necessary at points in the year other than your normal rebalance date, for example should a particular fund fall out of favour, not only would we switch that particular fund for a replacement but we could also take the opportunity to rebalance the portfolio; similarly should you wish to make an additional investment, we could rebalance the portfolio immediately to reflect this.
Where clients have requirements that do not allow a template to be attached (for example where a portfolio is very short term), there will be no change to the administration of these portfolios. |
