The (B)right Investment

Posted On Wednesday, 11 June 2003 02:00 Published by
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PROPERTY unit trusts are the bright stars in the dark investment universe of the past three years

PROPERTY unit trusts are the bright stars in the dark investment universe of the past three years. As an asset class, listed property has come into its own for investors who have seen the equities portion of their portfolio ravaged by bursting bubbles.

Lots of recent surveys have highlighted this; but just look at the Standard & Poor’s rolling numbers. Over three years, the average return for the only two funds listed that long – the Marriott property funds – has been 60,9%. Bond funds performed better (an average of 70,6%) but property trounced money market funds (36,4%) and, not surprisingly, SA general equity funds (14,5%). Over the past year, property unit trusts have beaten all the other unit trust sectors with a return of 20,6%.

Going forward, property funds don’t look too bad either – particularly as the corrected inflation data could see interest rates decline more steeply and rapidly than expected. They remain a good investment, but only for a particular class of investors.
I have two concerns about property unit trusts.

First, the apparent sudden rush by management companies (mancos) to launch new listed property funds. Some of these mancos say that it’s in response to client demands or it’s to fill a gap in the range of funds they provide. However, to me it smacks of bringing new funds to the market just as a sector may be peaking. That in itself creates demand – which may turn out to be artificial.

Second, that investors may be put into property unit trusts for the wrong reasons. Though I well realise that it’s only a small percentage of financial advisers who may be guilty of this, those putting investors into property unit trusts simply because they’ve been the best performers over the past year are doing their clients and the funds a massive disservice.

The same applies to small investors who are buying property unit trusts simply on past performance.

Recently I had an "argument" with an adviser who was suggesting that his clients should go into property unit trusts because they were a "safe haven" until markets settled down. That’s no reason at all to go into a property unit trust.

Property as an investment has distinct characteristics, one of which is that it tends to be contra cyclical. This is why property has been so rewarding over the past three years as equities have come crashing down. Another is that listed property (I’m not talking about your investment in your home) is reasonably low risk at preserving capital (but not particularly good at growing capital) and also provides a fairly predictable and stable flow of interest income.

So property unit trusts tend to be an ideal investment class for people needing a secure amount of regular interest income, who is mainly retired investors or those close to retirement. That’s a large part of the market and property unit trusts also lend themselves to living annuities – but only as part of the underlying portfolio.

Younger and higher risk tolerance investors need equities as part of their portfolio as well, as do living annuity portfolios if they’re going to last an investor through retirement. In short, property unit trusts are a great investment for retirees and for sensible diversification in a balanced portfolio. However, they’re not for everyone.

But, hey – what do I know? Listen to one of the people who pioneered listed property funds nearly five years ago: Simon Pearse, MD of what’s now called The Income Specialists, a division of Marriott.

Property funds are the core business of Marriott Asset Management, so if anybody would want to give them a plug it’s Pearse. However, he frankly says that they are for the retired investor or investor who needs high regular income, not for speculators or those who want to park money until they need a clear view on the market.

Says Pearse: "Yields of around 12,5% on property funds are great for retired investors who need that income – but not everyone. Fundamentals on property looking ahead are poor and we see minimal capital growth." He adds that more aggressive investors with a view of five years or more should be looking at equities right now. "I certainly wouldn’t be looking at bonds right now, with yields around 10%."

I’m not accusing all the latest property funds of being Johnny-come-latelies. These have qualities of their own – such as the new m Cubed property fund – that will suit particular investors who want a pure property play and monthly income.

However, don’t invest in property unit trusts for the wrong reasons. They’re not likely to remain the best performers for much longer.

Publisher: Finance Week
Source: Finance Week

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