Castle Trust slates property funds’ poor five year performance

29th January 2013

Financial services firm Castle Trust has warned that the performance of property funds leaves a lot to be desired.

It says that investors have lost 11.4 per cent over the past five years in an analysis of returns from 42 funds in the IMA property sector. It also points out that the first ranked fund has returned one per cent while the worst has posted losses of -26.6 per cent.

Of course, as a provider Castle Trust has an agenda because it is offering access to two investment products linked to UK residential property prices available as Individual Savings Accounts, products it has named the Income and Growth HouSAs. You can invest in these HouSAs for terms of three, five or ten years with performance linked to the Halifax price index. Depending on the term, you can take an income of between two per cent and three per cent from the income product while the growth product offers between 1.25 times and 1.7 times any increase of the Halifax House Price Index, and limits the loss to between 0.75 times and 0.3 times any decline. 

Chief executive Sean Oldfield hammers home the point about property funds' performance with the following statement. “Residential property has historically been a notoriously inaccessible asset class for investors, principally only for buy-to-let investors. Property investment for most people means investing in commercial property funds although many investors think they are gaining exposure to residential property through them."

“Property funds are not as liquid as they may seem. The reality is that investors try to sell when prices turn down, at which point they are locked in and then get the prices that can be achieved for the properties when allowed out. The idea that an open-ended fund can make illiquid assets liquid is misleading, as anyone who tried to sell a holding in a commercial property fund in 2008 will be aware.”

Mr Oldfield makes some interesting points, and it may be worth thinking about reassessing investments you have in property funds. We suggest that any adjustment to a portfolio is usually best done in consultation with a financial adviser. You may have some serious questions to ask about any property exposure you have in a portfolio even to the extent of asking whether you might not be better off in a HouSa for some of your cash.

At the same time, any property investments will be designed to provide diversification. That would certainly be the justification for much of your exposure. It is worth thinking about whether, by transferring, you are cutting your loses by moving out of a property fund and into something else or are you actually more in danger of crystallising those losses instead. Asset classes tend to move in cycles and the sector may be due an upturn.

That said, property investment as part of a diversified fund did become a bit faddish before the financial crisis with some expert raising fears that people were at risk of 'asset allocating downwards' when they diversfied in this way.

So as we say, we would accept that Castle Trust has an agenda but it doesn’t mean that it doesn't have a point. Then again you should always think carefully before you make any adjustments.

 

 

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