Property funds look set to become one of the most favoured destinations for investors’ money in 2007 following a bumper year in 2006, financial advisers predict.
This year, property was by far the most popular asset for UK investors who favoured specialist sectors over more traditional funds and equities. Even taking into account fund outflows, about £956m was stuffed into property unit trusts and open-ended investment companies (Oeics) in the first three quarters of the year alone, according to the Investment Management Association. This optimism was well rewarded. Some funds such as Aberdeen’s Property Share fund, the Premier Pan European property share fund and Skandia IM Global Property Securities all showed returns of more than 30 per cent.
“It was the best-selling asset class. There’s no question,” said Helen Stephenson, spokeswoman for the IMA.
While most fund managers expect equities will outperform property and bonds next year, the appeal of property to a nation obsessed with taking out mortgages to get on the housing ladder is hard to shake.
Some advisers, however, worry that the double-digit returns these funds provided in the last 12 months could be shortlived and investors would be wise to diversify their portfolios. “A huge amount of money has gone into commercial property this year and my feeling is that will carry on,” said Mark Dampier, an adviser with Hargreaves Lansdown, the UK broker. “But I don’t particularly like property. I think it’s overhyped and some of my clients are putting too much money there. Some want to put over 50 per cent of their portfolio into property and that makes me nervous.”
Andrew Smith, head of research at Arlington Securities, the property group, predicts average returns on UK commercial property will fall below 10 per cent in 2007, down from nearly 20 per cent last year. “In this increasingly challenging environment for fund managers, active asset management will be vital in order to secure consistent above-average returns and to take advantage of the unique income growth characteristics of property,” Smith said. But Smith does believe the introduction of real estate investment trusts (Reits) in January will “help to sustain demand in the underlying property market”.
Other areas that will continue to draw interest in advisers’ view are emerging markets, particularly Russian and Chinese funds which saw some strong performances last year, and UK income funds such as Invesco Perpetual’s High Income fund run by Neil Woodford, and Artemis’s income fund.
Fund managers and financial advisers predict that bellwether stocks, Europe and the Asia-Pacific region excluding Japan are three areas likely to outperform, according to a poll conducted by the Association of Investment Companies and IFA Promotion, two industry groups.
But investors would be wise to be a bit cautious. As Justin Modray, an adviser with Bestinvest, says: “Only one thing is certain about predictions and that is there’s a fair chance they will be wrong.”
In the same poll last January, scores of fund managers predicted the performance of the equity market in Japan would surpass that of all other parts of the world.
Alas, this was not the case. The 20 worst-performing funds of the year were all Japanese equity funds, according to Standard & Poor’s, with annual losses ranging from 17.8 to 48.56 per cent. Japan’s fortunes were impaired by allegations of securities law violations at Livedoor, a small technology company, in January, which led to a broad sell-off and the collapse of the Tokyo Stock Exchange’s trading system.
