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OPINION

Hybrid property funds: another option

Hybrid property funds: another option
October 14, 2021
Hybrid property funds: another option

Considering the problems encountered by the sector in recent years, it might seem odd that a new open-ended property fund has entered the market. Yet this one promises to be different. Time: Property Long Income & Growth fund (GB00BMH82X78) will take a “unique” hybrid approach, holding both real estate securities and directly held property assets.

The rationale makes sense: with around a third of assets in direct property, 7.5 per cent in cash and the rest in real estate shares, the fund will seek to offer better liquidity than open-ended funds that focus purely on holding property directly, with lower volatility than a portfolio of listed real estate securities. While investment trusts are generally the best option for accessing illiquid assets, this might appeal to investors who don’t want to think about the share price dynamic of a closed-ended fund.

Having said that, I’m not sure this offering is unique: another open-ended fund, BMO Property Growth & Income (GB00BQWJ8794), has applied a hybrid approach for many years. Around two-thirds of this fund were in property shares at the end of July, with 31.6 per cent in UK direct property. Which begs the question: how has the hybrid approach fared?

If we compare the BMO fund with open-ended vehicles that hold UK property directly, the record is mixed. The fund could not escape the material uncertainty that descended on the property sector in the earlier stages of the pandemic and had to suspend trading alongside the direct property funds in March 2020. But it was able to resume trading in June that year, making it the first fund to do so. From the Financial Conduct Authority’s (FCA) wording, it also sounds like the regulator’s proposed rules for open-ended property funds (including a waiting time on investor redemptions) should not apply to this hybrid fund.

BMO Property Growth & Income had a historic yield of 3 per cent at the end of July, putting it roughly in line with plenty of open-ended direct property funds. Its total returns currently look pretty impressive versus the funds in that sector, although it’s likely the BMO portfolio will have bigger gains and losses when equities are volatile. With markets rising for much of this year, it has outpaced most of the open-ended direct property funds so far in 2021. In 2018, a difficult year for stocks, the BMO fund lagged all names in that sector.

The BMO fund has also lagged some of the open-ended funds that purely buy listed real estate and property securities over the past five years, which shouldn’t come as a surprise. It has outperformed investment trusts that buy UK commercial property over the same period, although the past year has seen many of the trusts’ shares surge ahead as they recover from 2020’s doldrums. Also note that when it comes to income plays, many of the investment trusts will offer higher dividend yields.

The hybrid approach does seem to have offered an interesting middle ground with fewer liquidity concerns and reasonable returns. But one note of caution if you view property as a diversifier to equities: the BMO fund fell harder in the market sell-offs of both spring 2020 and the final quarter of 2018 than any of the open-ended direct property funds.