Plenty of debate has centred on the role of property security funds within an investor's portfolio. ...
Plenty of debate has centred on the role of property security funds within an investor's portfolio. Research from JPMorgan shows that including just 5% of real estate securities within a balanced UK equity and bond portfolio can help to balance risk and reward more efficiently.
Scott Blasdell, manager of the new JPM Global Property Securities fund, says property offers true geographic diversification, which isn't always easy to achieve via mainstream international equity funds.
He says property as a sector is less affected by globalisation trends than many of the mainstream sectors. For example, some UK companies, including GlaxoSmithKline, Royal Bank of Scotland and BT, all earn a vast amount of their profits from overseas, and holding these shares actually gives more exposure to international trends than to the UK economy. There are similar examples throughout the world.
"Unlike manufacturing goods and an increasing number of services, which can target customers thousands of miles away in international markets, property can compete for tenants only within a few miles," he says.
Some investors have challenged the investment case for global securities funds, because the volatility is more akin to equity markets rather than the physical property sector.
Andrew Cox, manager of the Schroder Global Property fund, says conventional analysis of the relationship between global property securities (GPS) and the wider equities markets illustrates that the correlation coefficient of monthly returns is about 0.7.
However, the convention of testing the relationship between GPS and the wider market on a month-by-month basis is arbitrary and does not equate to the holding period of most investors. Like equities, property should be regarded as a long-term investment. Research shows that over three years, the correlation between GPS and general equities drops right down to about 0.3, illustrating little relationship.
"This implies that an investor holding GPS for two or three years will receive returns that are quite different from the wider equities market, giving meaningful diversification," he says.
He adds a further myth exists in that property securities don't behave like direct property. While research shows that on a one-month basis there is no relationship between the returns on property securities and returns on direct property (0.06) over the longer-term period of three years, the correlation between the returns on UK property securities and the IPD Monthly index climbs to 0.65, indicating a fairly significant relationship.
"This supports our view that long term, the returns on property securities are determined by the underlying property market, with the precise activities of property companies providing some differentiation."
Meanwhile, the outlook for global property remains rosy, according to Steve Buller, manager of the Fidelity Global Property fund.
In particular, Buller likes the UK property market. He says: "The London office market is doing well and the retail sector in the UK has shown itself to be surprisingly resilient to any fears of a slowdown."
Buller says that UK property continues to trade at a relatively attractive valuation and the introduction of Reits in January 2007 should further invigorate the sector. key points
Property adds true global diversification
Short-term volatility akin to equity markets
Over the long term, returns are less correlated to equities
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