The pros and cons of hybrid real estate funds

Last October, Time Investments launched a hybrid real estate fund, aiming to fill that void for investors keen on real estate but less concerned about not being able to access their cash.

Marcus Phayre-Mudge, one of the managers of the Columbia Threadneedle Property Growth & Income fund, said hybrids are the solution to the problems faced by investors who want both exposure to physical property and cash.

The perfect combination is 65% equities and 35% physical assets, he said, although the shares must be liquid, which means the fund does not invest in many smaller companies.

The fund also focuses on income-producing real estate investment trusts.

“With physical ownership, the important thing is to keep your land size appropriate,” Phayre-Mudge said.

“In our fund, the largest building is around £15million, and our smallest building is two or three.

“But the fund won’t grow beyond £1billion because we want to make sure we don’t have to, like some of the open-end funds were, end up buying really big chunks of property.”

This gives the fund more flexibility in redemption periods.

Performance

Compared to the other IA property sector, in which hybrid properties are found, IA direct ownership was the strongest performer, returning 8.76% in the six months ending June 30, but investors should beware of the risks associated with investing in this sector.

The sector includes open-ended real estate funds, which have faced periods of freezing investor cash as funds are locked against withdrawals.

The problems started after the Brexit vote in 2016, when funds rushed for redemptions amid worries about valuations.

Then again in 2020, the pandemic left fund managers no choice but to suspend funds again, after most independent assessors said market conditions made it impossible to assess composition. wallets.

Last May, Aviva Investors closed its UK property fund, fearing it had become increasingly difficult to generate positive returns while maintaining enough cash to re-open the fund. This has remained blocked since the start of the pandemic.

The following month, Aegon also closed its real estate fund, citing similar issues.

More recently, Janus Henderson sold his entire property fund portfolio after saying the “current strength” of the UK commercial property market as well as “ongoing regulatory discussions” over the future of open-ended property funds were the reasons for this decision.

Time’s fund hasn’t been running long enough to properly measure its success, but there is another that launched in 2015.

The only other hybrid property fund in the UK is the CT Property Growth & Income Fund.

The fund has exposure of 37.7% to UK direct property, 30.3% to ‘mainland’ equities and 26.5% to UK property securities, with 5.5% in cash.