Funds that defied the Great Brexit lockdown

Bets on property pay off despite panic one year ago

O Ne year has passed since a number of UK property funds were suspended in a wave of post-Brexit panic. Despite broadly positive returns, debate still rages around the controversial sector.

In the weeks leading up to last June’s referendum, investors pulled swathes of cash from UK property funds as a result of concerns that valuations were set to go south. These fears were only made worse by the unexpected Brexit vote.

Suddenly unprecedented levels of outflows followed. This led asset managers such as Threadneedle, henderson, and l&G to suspend trading in their funds in a bid to stop cash levels from falling too low, trapping more than £18bn of investors’ money.

The suspensions divided the investment industry into two camps. Supporters argued that those heading for the exit had misunderstood the products.

Typically, property funds are held for long periods of time, during which they reliably provide income, with returns largely not linked to the UK stock market.

BUT detractors said the suspensions demonstrate the problems of holding property, which typically takes months – or even years – to sell, in a fund which allows money to be withdrawn with little- to- no notice.

After a few months, all of the funds had re-opened after managers raised cash levels to a high enough amount to allow those investors wanting to leave to do so. As the table shows, over one year, all but two of the funds which were gated have delivered positive returns to investors. Despite the Aviva Investors Property Trust and the M&G Property Portfolio losing small amounts of money, the rest of the funds have delivered single digit growth (with the exception of the Kames Property Income fund, which has returned 14.8pc).

Meanwhile, the wider IA Property sector averages a 7.9pc return, less than a 28.1pc return for the IA UK All Companies sector but surpassing the 1.2pc offered by the languishing IA Gilts sector, which also relies on regular income payments.

Rob Morgan, pensions and investments analyst at Charles Stanley Direct, said the results show property funds have provided some stable diversification to investors alongside regular and potentially rising income while interest rates have remained low.

‘While they certainly don’t provide disaster insurance against economic calamity, the more stable, incomegenerating characteristics of physical property mean it has a place in investor portfolios,’ he said.

But Jason hollands, managing director at Tilney, said that while the performance shows promise, returns and yields are likely being diluted by the high levels of cash currently being held by managers – cash which is paying little to no interest.

‘At the moment we are relatively cautious towards the UK property market,’ he said. likewise, Richard Philbin, chief investment officer at Wellian Invest- ment Solutions said that by holding so much of investors’ money in cash rather than property, managers could be falling short of their mandate.

‘If only 70pc of an investor’s money is invested in the asset class they thought it was going to be invested in, then is the manager actually keeping to objectives?’ he said.

Ben Yearsley, director at Shore Financial Planning, echoed this: ‘On the one hand, managers are being prudent, but on the flip side investors are getting nowhere near the full exposure to property they might expect.’

Tom Becket, chief investment officer at Psigma Investment Management, goes one step further, arguing the funds are risky, inefficient, and expensive.

‘Mixing short term cash flows with long-term illiquid assets has always struck us as an accident waiting to happen and we would urge against such investments unless there is genuine obvious value or a recovery situation as we last saw in 2009.’