Property leads the way this September

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%.

Property shares

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.

Bricks and mortar

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

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.