Source: What Investment
The top asset class for UK investors in 2015 and beyond is UK property, according to Justin Onuekwusi, multi-asset investment manager at Legal & General Investments.
He told What Investment, ‘At present you are seeing rental growth in the secondary market as well as in the prime market, which shows that the recovery in the property market is broad based, and you are seeing capital values and transactions increase around the country as well.’
In terms of how to access this growth, Onuekwusi favours investing through open-ended funds, rather than REITs or investment trusts, and prefers funds that actually invest in ‘bricks and mortar’ property, rather than those that invest in property company shares.
The reason for this is diversification. He told What Investment, ‘The problem with investing in property investment trusts, or funds that invest in shares, is that they can be quite volatile – as volatile as the stock market – and that means you are not getting.
the diversification away from the equity market that is part of the reason for investing in property.’
He added that the volatility of investment trusts moving to discounts or premiums diminishes the investment case for property investment trusts.
Many investors are concerned that when investing in open-ended property funds, returns can be diminished by a ‘cash drag’. This means the fund having to keep substantial amounts of cash in the fund, rather than invested in property, so as to be able to meet the needs of investors wishing to redeem their investments and take their cash out.
With interest rates currently at record low levels, the returns from holding cash are low, and dampen the gains from the property.
But Onuekwusi feels that investors can solve this by ‘looking through the property fund’ and finding a fund where the level of cash is set at ’15 or 20 per cent’. The cash drag is unlikely to be materially significant in terms of returns, ‘but some property funds have cash at 30 per cent, so if you have 10 per cent of your portfolio in property, with that cash drag it is now only 7 per cent, with £7 out of every £10 of your money in property and the other £3 in cash’.