Property funds which hold shares rather than physical property could be a more volatile investment, according to research by New Star.
Since commercial property funds became eligible for ISA investment at the end of 2005, it has become a mainstream asset class alongside equities and bonds, but New Star is expressing concerns investors may not realise many of the recently launched property funds do not include physical property.
It says there are two main types of property funds, those which hold physical properties and those which hold property company shares or real estate investment trusts (Reits).
And New Star claims funds which hold property company shares rather than bricks and mortar, are likely to be more volatile, according to its analysis of 15 years of data.
For the analysisi it looked at physical commercial property as measured by the IPD Property Total Return Index, property shares as measured by the FTSE Real Estate Total Return Index, UK equities as measured by the FTSE All–Share Total Return Index and gilts as measured by the Citigroup UK WGBI 7-10 Years Total Return Index.
As a result, New Star claims while physical property, UK equities and property shares all produced average annual returns of around 11% over the last 15 years, the volatility of physical property was far lower than all the other asset classes including gilts.
Phil Wagstaff, UK sales and marketing director, says if investors want to benefit from the low volatility and diversification commercial property can offer, they need to consider funds with a high content of physical property.
He adds: “Our concern is that investors new to property funds may select a fund with a high property share content in the mistaken belief they are lowering risk as well as diversifying their portfolios. In reality investors may be adding volatility.”
Helen Richardson, of financial adviser Pantheon Investments, says following a spate of new fund launches, investors need to be clear about the type of property fund they are investing in.
She says: “The New Star analysis shows that bricks and mortar funds and property funds are as different as chalk and cheese. If investors are choosing property funds to add asset class diversity and to reduce the volatility of their portfolios they should stick to funds with a high proportion of bricks and mortar.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
To ensure creditworthiness assessments compliant
Avoid broad-brush strokes
Partner Insight: Introducing the Architas education series for clients.
What made financial headlines over the weekend?