Property Reporter

INVESTORS who recognise the benefits of backing listed property, but lack property expertise for appropriate stock-picking, can invest in one of the "funds of funds" in the property arena, says the Association of Property Unit Trusts.

Funds of funds are essentially equity unit trusts that invest primarily in property unit trusts and property loan stock companies.

The Association of Property Unit Trusts says one of the main advantages is that these funds are actively managed by a team of property experts who can stock-pick on the investors' behalf.

While some commentators believe that investing in funds of funds carries distinct advantages, others concede they have merits, but argue that the fees an investor pays when buying into a fund of funds are much higher than the brokers' fee you would pay if you were buying listed property stocks directly.

Gerald Nelson, of the Association of Property Unit Trusts, says funds of funds offer a host of benefits to the man on the street.

He explains that because the funds invest in listed property, they deliver a secure, growing income stream derived from contractual property rentals, as well as capital growth.

"Listed property has consistently outperformed other asset classes and provided higher yields than other income-generating unit trusts, such as gilt or money market funds.

"Property is a long-term investment, providing steady growth. The growth of the income stream occurs independently of movement in capital values," says Nelson.

He says an investment in one of the funds does not require in-depth knowledge of the property market. The funds control risk through diversification and investment in a number of listed property entities.

Nelson says risk is further reduced through the introduction of an element of cash or short-dated money market instruments to protect income and capital during times of property weakness.

An additional benefit is that the funds offer full liquidity, whereas some of the individual property unit trusts and property loan stocks are still fairly infrequently traded.

Mariette Warner, Standard Bank Property Income Fund, a fund of funds, says that buying individual shares in any reasonable volume in a listed property vehicle raises liquidity problems.

"When you want to liquidate your investment, liquidity becomes a problem, while funds of funds offer full liquidity and your funds are immediately available," Warner says.

She says a lot of investors did not know about funds of funds in the past because they have not been widely available.

Warner says now that the listed property sector has grown significantly, there is more capacity available for investors.

However, Marc Wainer, who is a director on several listed property funds, including ApexHi Properties, Redefine Income Fund, Hyprop Investments and Prima Property Trust, says that while funds of funds have their merits, you have to pay a fee, which is much higher than a brokerage fee if you had bought listed property directly.

Wainer also says there are other options available to investors, such as investing in hybrid property funds.

Hybrids invest in other listed property stocks to increase the sector spread, improve diversification and to have greater market capitalisation and increased tradability.

Wainer disagrees that liquidity is a problem for the smaller investor.

"Most of the funds for a smaller investor have sufficient liquidity. Major institutions do battle with liquidity in smaller funds, which in itself creates an opportunity for the smaller investor because the yield will be higher as you do not have the weight of institutional money in it."

Wainer says that if an institution decides on buying R10m worth of shares, it will drive the price up and consequently the yields down.

He says the smaller funds, which institutions do not usually fancy because of the lack of liquidity, offer smaller investors opportunities for higher yields.

"The more liquid the fund, the lower the yield," Wainer says.

Anton de Goede, investment analyst at Catalyst Securities, says the two primary issues are experience in the listed property sector and liquidity.

"If you don't have a lot of experience in the listed sector, there is definitely merit for funds of funds.

"You gradually obtain knowledge and exposure to the different counters in the sector and eventually when you know the sector, you can chose individual counters because you can focus on what you like."

De Goede says the smaller property funds do offer liquidity to the smaller investor, but at issue is normally the spread between the buying and selling price.

For instance, if you are wanting to sell 1000 shares there could be a big spread, which is the difference between the buying and selling price.

"You don't want to drop your price if you're selling just to get your shares out. There is liquidity for the smaller investor but you must be prepared to take the spread risk," De Goede says

Nov 27 2003 07:18:19:000AM Nick Wilson Business Day 1st Edition