The siren is sounding.

Posted On Wednesday, 20 August 2003 02:00 Published by eProp Commercial Property News
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Property unit trust funds are the hot sector right now. And as with anything hot, some cool-headed caution is needed. The possible danger could be summed up in this expansive observation by Barend Ritter, head of individual retirement products at Allan Gray

Simon PearseThe curse of humans is that we are herd of animals and like to do things together."  Concerns about listed property investments are equally explicated by Simon Pearse, MD of Marriott division Income Specialists and the unofficial godfather of property funds. "It's not that we're concerned about the asset class itself, but rather what it delivers. Investors must have realistic expectations about property going forward."  Somewhere between these quotes, sensible investors should find a place where they also feel just a bit uncomfortable with the ongoing rushinto listed property.

There's no denying that it's been a great investment since the late Nineties, especially for those who got in early. And property may still have some way to go on the back of declining interest rates. However, prudence is now key for investors considering a new investment in property funds - even investors best suited to the asset's defining characteristics of high predictable income and capital preservation.

Conspiracy theories abound, mainly in the financial adviser industry, where some, though not all, are exploiting property unit trusts as an easy sell based on their history of trouncing other unit trust sectors over the past few years and carrying relatively little risk.  One accusation is that
Ritter is trying to rubbish property funds because Allan Gray is currently low on property portfolio holdings, does not have a property equity unit
trust and has always favoured active equity fund management. Others say Pearse is pouring cold water on new property fund investments because Marriott has had to cap its property equity and property income funds to new investments.  Instinctively, I'm all for conspiracy theories - it comes with the trade - but can see no merit in this batch.

Some investors may remember that Allan Gray was particularly upbeat on property in the late Nineties, with property holdings exceeding 20% in many of its funds. However, few investors and advisers paid much attention to that then as they raced headlong into global equity stocks and small cap counters in SA.  Similarly, Marriott has built its reputation on property and remains committed to this asset class, under the right conditions. Pearse says that the funds were capped because capacity had been reached in the property unit trusts (Puts) it was invested in and, of the remaining Puts, "there aren't any we would want to invest in now".  But Pearse adds: "Even if we had the capacity, we probably wouldn't be buying Puts now. They look fully priced, with many at a premium to net asset value.

I feel all the good news is already in the price."  What Ritter is trying to show is that investors who need high income and low risk - such as retirees - don't necessarily have to invest in a single asset class. He says that a well-managed prudential fund has a similar level of volatility to property funds and the same potential returns, without the risk of being exposed to a single asset class and the comparatively higher downside risk that property carries now.  To demonstrate, Ritter constructed two portfolios: one of Puts back to 1986, the year after they came to the market; the other consisting of 30% equities and 70% cash and bonds. He measured standard deviation (as an indication of volatility, or risk) over five-year periods and the annual average return also over five-year periods.  The results: Puts showed mean standard deviation of 17%, compared with 12% on the 30/70 portfolio, and Puts had an average return of 14%/year compared with 16,6%/year for the 30/70 portfolio.

Ritter does seem to make the point that a prudential fund portfolio can perform as well as property with no more risk. His advice is that, while
property remains attractive over the short term, investors should consider shifting some funds to a prudential fund to get the upside potential of
equities and diversification.  This converges with what Pearse is saying. "I think even retired investors should start partially moving money into
equities - as long as they stay with the quality companies. I see a future in balanced, prudential-type funds."  Marriott is making its first move into the pre-retirement market next month with the launch of a preservation fund that Pearse says will show "the benefit of reinvesting predictable income".

If Marriott is diversifying, property bulls should take note.

Last modified on Saturday, 10 May 2014 15:13

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