DFM property allocations run from underweight to highest ever levels

BMO Gam pricing switch could signal change in sentiment after M&G Property Portfolio suspension

Ben Conway
Ben Conway

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Hawksmoor Investment Managers is currently running property allocations at the highest ever levels since its portfolios launched over a decade ago.

“If we can own a Reit that deploys only modest leverage, in a subsector with a significant macroeconomic tail wind, and can generate 10%+ returns, with the income linked to inflation, we’d be mad not to have high weightings,” says senior fund manager Ben Conway (pictured).

He compares that to the “paltry yields” available in bonds, and the “hugely expensive” valuations prevalent in the equity markets to explain why the Hawksmoor Distribution fund currently has over 20% in property, having been “diminimis” at launch in 2012. The Vanbrugh fund has 13%, having been zero 10 years ago, while the Global Opportunities fund, launched in September 2018, has 11% exposure.

 Is the headache over for open-ended property funds?

That might not chime with headlines that have plagued the asset class since Brexit.

In December, the M&G Property Portfolio suspended after redemptions overwhelmed its cash buffers, which at 4.8% were the lowest in the Investment Association UK Direct Property sector.

Since July 2016, immediately after the Brexit referendum, the eight largest constituents of the sector have faced redemptions of £8.2bn, according to Morningstar data.

“Almost every fund manager’s presentation I have seen recently, property or otherwise, kicks off with a few slides on liquidity – specifically, how quickly varying proportions of the underlying assets can be realised within a matter of days,” says Whitechurch investment manager Tim Jones.

But BMO Gam’s announcement this month that it would be switching to offer pricing, having only just switched from bid to mid in January, has some suggesting the asset class’s woes could be coming to an end.

Hawksmoor’s property overweight filled with Reits

Hawksmoor is picky with its property exposure and targets small sub sectors, says Conway.

“The best value is not to be found in large office or retail, or indeed in the larger Reits which have fairly vanilla exposure concentrated in these sectors,” he says.

“We prefer exposure to sectors such as industrial, logistics, care homes, social housing, Berlin residential, regional offices, long leases and specialist asset managers taking advantages of shorter leases.”

The investment manager holds Urban Logistics, Phoenix Spree Deutschland, Civitas Social Housing, Warehouse Reit, Regional, AEW UK, Impact Healthcare, Supermarket Income Reit.

Industrial property and offices offer yield opportunities

No other fund picker Portfolio Adviser spoke with shared Hawksmoor’s bullishness on the sector.

In the open-end space, Tilney is neutral on property holding a small strategic allocation to L&G UK Property, Janus Henderson UK Property and Standard Life UK Real Estate.

These funds are less exposed to stresses in the retail sector and are more focused on the industrial and office sectors, says Tilney head of multi-asset funds Ben Seager-Scott.

“There are important liquidity considerations, but if you are able to take a strategic position, I think the return on offer, primarily through rental yields, is attractive against the near-zero interest rate environment we find ourselves in,” says Seager-Scott.

The Tilney Balanced Portfolio currently has 5.8% in property with 4.3% in direct property and the remaining 1.5% in securities. The Tilney range has had between 4.5% to 9.0% over the years, says Seager-Scott.

EQ Investors points to the retail sector has one of the drivers for its underweight in property. Head of impact investing Damien Lardoux says the wealth manager has become even more cautious over the last year, noting property transactions have “pretty much come to a standstill”.

The M&G Property Portfolio pointed to this in its latest monthly fund review noting transactions were down 52% in 2019.

FCA and liquidity remain a challenge for open-ended funds

While EQ favours investment trusts, Lardoux reckons the open-ended space will remain challenged.

The rise in outflows has resulted in sales of some of the best performing assets in the industrial and alternative sectors, he says.

Additionally, the Financial Conduct Authority’s rules on illiquid assets in open-ended, daily dealing funds could result in the sector facing more suspensions, he says.

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