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October 2015 - Property

September proved to be another bruising month for investment markets. With the exception of developed market bonds and property, all other asset classes were in negative territory. Bond markets performed well after the US Federal Reserve (Fed) decided not to increase interest rates, but the same decision was received badly by equity markets, as it was seen as a sign of weakness in the US economy. The main US equity market, the S&P 500, made a loss of 2.54%. The UK equity market, measured by the FTSE 100 index, did even worse - down nearly 3% in just 30 days.

In contrast, the average return for the IA Property sector was a positive 0.76%. Now, this sector is a real mish-mash of different types of fund, so we have to be a bit careful when looking at averages. Of the 44 funds in this sector, 24 of them are property securities funds (they invest in the shares of companies that deal with property in some way). The remaining 20 invest in bricks and mortar (they own buildings). Some invest in shares or buildings in just the UK, others invest in them in other countries or regions. Quite a variety of funds, I’m sure you will agree!

So let’s look a little more closely. The best performing fund returned 5.9%* in September, and the worst a negative 1.32%*. So every fund managed to outperform the UK and US equity markets. Both of these funds happen to be property security funds. The best performing bricks and mortar fund returned 1.13%.

Whilst bricks and mortar property funds tend to be used for diversification (or income) purposes within a wider investment portfolio, property securities funds are still ‘equities’ and therefore don’t offer the same type of diversification. In shorter time periods especially, you would be forgiven for expecting them to act in the same way as other equities and to have lost more ground last month.

That they didn’t may well be down to the fact that property securities were unduly hit in advance of the run up to the Fed’s interest rate decision. As there was no increase, a relief rally for property equities may well have ensued, thus ending the month with positive returns for these types of funds.

Looking into the future, true diversification is only achievable by the use of the traditional bricks & mortar funds. Commercial property is usually the last asset class to go into a recession and the last asset class to come out. There has certainly been more interest in these funds from FundCalibre users – the Elite Rated funds in our property sector saw a huge 263% increase in visits in September. FundCalibre’s Elite Rated property funds are Henderson UK Property, which invests in brick and mortar, and F&C Real Estate Securities and Premier Pan European Property, which invest in property securities.

Whilst property has done well in the past two to three years, there appears to be further to go. The capital returns may be more pedestrian than we have been used to in the past couple of years, but rental increases should help these funds hold their own. The yield differential between government bonds and property remains wide enough to provide a reasonable cushion to withstand an increase in interest rates as and when (or indeed if and when) there is one.

*Source: FE Analytics 01/09/15 – 30/09/15

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Tony Yousefian, Consultant – October 2015

©2015 FundCalibre Ltd. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of FundCalibre Ltd, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by FundCalibre Ltd, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. FundCalibre Ltd shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use.