There’s a good chance that some of your investment portfolio is suspended right now. Particularly if you diversify and invest in different assets including property funds.
Most UK property funds are suspended meaning you cannot buy or sell units in these funds.
This could have real serious implications if you require income from your portfolio in the near future. It will also impact the overall risk profile of your portfolio going forward.
Here’s what’s happened and what you should consider next.
Why property funds are suspended
There are really only 5 different assets that you can invest in. Cash, commodities, fixed interest, property and equities.
In order to have a well-diversified and balanced investment portfolio you will probably need to invest a bit in each.
The below table shows the correlation between UK direct property and other assets like equities and fixed interest over the last 10 years. A correlation close to 1 means that both assets tend to move in the same direction. A correlation close to -1 means that assets move in opposite directions. A low correlation can be useful in minimising risk for a portfolio because if one asset is doing bad, the other asset might be doing well and therefore reducing losses or still returning a profit.
As it requires a lot of money to invest directly into one physical property most investors will use property funds where your money is pooled together with others, and then invested in many commercial properties.
Ever since the Covid stock market crash most UK open ended direct property funds have suspended trading.
This is because these funds will hold physical property. Buildings like office blocks and retail units. They make a return from the rent charged and the value of the buildings going up over time.
Recent events mean it is currently very difficult to value these types of properties. For example, will businesses need as much office space going forward if staff are working from home? How many retail businesses are going to survive?
Also, when a large number of investors want their money out of the property fund at the same time, it is impossible for the fund manager to sell the physical property quick enough for a fair price.
So this all leads to a suspension. Current investors can’t sell their units and get their money out and new investors can’t buy new units.
This has happened a number of times in the recent past and after a while when things cool down and property is re-valued the funds will re-open again.
But this time the Financial Conduct Authority (FCA) are proposing new rules for open ended property funds. They are suggesting that there should be a permanent notice period on these types of funds. This would mean going forward, you would always have to wait 180 days before being able to withdraw your money.
Property fund alternatives
Our current RTS Investment Strategy does not invest in property, however we recognise this as a vital diversification tool and our investment committee are analysing the best way to use property.
One way is to consider a closed ended property fund like a Real Estate Investment Trust (REIT).
These types of funds work very similar to an open ended fund with one key difference. Closed ended funds only have a fixed number of shares in issue. You do not redeem units with the fund manager like you do for open ended funds. Instead you sell your shares to other investors like you would with equities.
This way the fund manager of a closed investment fund doesn’t need to sell the underlying property it holds to give money back to investors. Investors in REITs can sell their shares whenever they want.
Whilst this seems like an ideal solution you must be careful here. If we look back at the correlation table and this time include property investment trusts we can see that they are more closely correlated to equites.
This can mean that if you include REITs in your portfolio you are in fact increasing the risk of the portfolio when compared to open ended property funds.
When we look at past performance we can see that closed ended property funds are far more volatile than open ended property funds over the long term.
There is a balance to be had here between increased access to your money and extra risk.
You need to be careful if you do include a REIT that you know what the underlying holdings and strategy of the fund is. There could be a huge difference in performance and volatility going forward investing in distribution warehouses vs retail units. Or care homes vs office blocks.
Our investment committee will only be recommending a REIT for inclusion in the portfolio when they feel they have identified the right type of fund.
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Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
