This new tracker fund allows members of the public to take a stake in £50 billion of property. What's the catch?
Each year sees the launch of dozens (sometimes hundreds) of new investment funds, so my attention is rarely grabbed by the introduction of any particular fund.
Nevertheless, back in December, I did notice that one investment manager had launched a radically different kind of commercial property fund. Unfortunately, as this tracker fund was only open to institutional investors, it wasn't worth a mention at the time.
However, as investment boutique Bespoke Financial Consulting has now thrown open its "CF Bespoke IPD UK Monthly Index Tracker Fund" to the public, it's now worth reviewing for the benefit of the Foolish audience.
This open-ended investment company (OEIC) is very different from conventional property unit trusts and OEICs, because it doesn't invest directly in bricks and mortar. Traditional property funds buy retail, commercial and industrial buildings, complexes and even entire shopping centres in order to build up their asset base.
Hence, if there is a run on a typical fund, when lots of investors are queuing up to withdraw money, a fund manager may postpone withdrawals until enough properties have been sold to release cash. Thus, illiquidity -- difficulties with buying into or selling out of a fund -- can be a problem for established property funds.
The Bespoke fund gets around this problem by not buying properties at all. Instead, it tracks the Investment Property Databank (IPD) UK Monthly Index. This index has been produced by IPD since 1995 and tracks the value of 3,820 industrial, office and retail properties owned by a range of investment companies and fund managers. The current value of this property portfolio is £50.5 billion, so this is a widely diversified and comprehensive index.
In order to track the IPD index, the Bespoke fund uses complex financial instruments known as swap derivatives, which allow the manager to allocate close to 100% of investors' funds towards tracking the index. Hence, investors in this passive fund will have less exposure to cash than those in actively managed property funds, plus their returns should be less volatile.
Now for the basics: the minimum investment is a lump sum of £1,000, which makes it open even to investors of modest means. This fund can be bought inside an Individual Savings Account (ISA), Private Equity Plan (PEP) or Self-invested Personal Pension (SIPP), which allow investors to benefit from tax-free gains and income. Speaking of income, the fund pays half-yearly interest, rather than dividends, so tax on this interest may be reclaimed inside the above tax shelters.
Commercial property as an asset class has produced some impressive returns, especially since the turn of the century, as shown by IPD's annual index in the following table:
IPD UK Annual Index: all-property total returns, 2002 to 2005
Year | Annual return (%) |
|---|---|
2002 | 9.6 |
2003 | 10.9 |
2004 | 18.3 |
2005 | 19.1 |
2006 | (Out 23 Feb) |
In the longer term, this index has recorded annualised gains of 10.9% a year over the past 25 years, demonstrating the importance of including exposure to commercial property in balanced portfolios. So far, so good. Now for the bad news: somewhat predictably, this fund's fees are considerably higher than those charged by the cheapest stock-market index trackers.
Any investment in the Bespoke IPD UK Monthly Index Tracker Fund attracts a 5% initial charge plus an ongoing annual management fee of 1.5% a year. These fees are deducted from capital, which enables the fund's yield to be maintained at a high level, but reduces investment growth. Compare these with the FTSE All-Share Index tracker in which my five-year-old son recently invested, which has no upfront or exit charges and has total annual charges amounting to a mere 0.3% a year.
One reason why this fund charges steep fees is that it is available via independent financial advisers (IFAs), which receive an initial commission of 3%, plus renewal commission of 0.5% a year. Then again, by using a discount broker or fund supermarket, you may be able to reduce or even eliminate these commissions altogether. (However, going direct to Bespoke will not help reduce these charges.)
In summary, this fund manages to do away with many of the problems faced by conventional property funds. Still, I won't be investing in it, largely because of its high charges. What's more, the above-average returns of recent years suggest that a bubble may be developing in commercial -- as well as domestic -- property values, so I'll steer clear for now.
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