I read a very lazy piece of journalism last week in the money supplement of The Times. It does annoy me that even within the supposed quality broad sheets you still get sensationalism. We have to remember that everyone’s an expert nowadays, and everyone can also be a journalist (just as I am doing so now!) but that means that the ‘proper’ journalists have to make the most of a story, and there’s nothing better than a story that creates fear.
Currently the demon in the room is the word ‘liquidity’ or more importantly ‘illiquidity’ and the press, the latest subject to attract their attention, and to create suspicion and fear, having given Neil Woodford a beating that he will probably never recover from, is Open ended investment funds that invest in UK Commercial Property.
The problem, quotes The Times, along with other papers, is that because the underlying asset isn’t as liquid as stocks and bonds, there could be liquidity issues if everyone runs to the door, as happened after ‘that vote’ back in 2016. This caused investment companies such as M&G and Standard life to suspend dealing in their Property funds. Or to put it another way, you couldn’t get your money out.
Now, don’t get me wrong, they are investments and we all know that any investment comes with risk. However, it is easier to demonise a fund manager than it is to blame the irrational investor who will come in the form of an institutional pension fund, a multi-manager fund or an everyday investor, because the fact of the matter is that short term volatility, or short term tactical bets on the property sector should not be an issue to the medium to long term investor and if you haven’t got a timescale of at least five years, you really shouldn’t be in a Property fund.
But that’s not what the papers are going to tell you. These wise sages will pander to short-termism and advise that the savvy investor doesn’t buy a cumbersome open ended Property fund but instead buys a Real Estate Investment Trust (REIT) which is an investment company that is traded on the stockmarket and so it is far more liquid and allows you to get your money out. What they are failing to tell you is that REITs (like all investment trusts) trade at premiums or discounts to their Net Asset Value (NAV)
So, whilst an Open ended company may chose to suspend, the net asset value is reflected in the share price (I am slightly simplifying things here but I am trying to make a point!) but a REIT share will only be sold if a buyer can be found and that buyer will probably be looking for a bargain whilst sentiment is poor for that sector. So, yes, the NAV might be one pound per share, but I will only buy it off you for eight five pence (a 15% discount)
It is the short term nature of investors which is forcing the open ended Property funds to have to be holding so much cash (thus diluting the return) when the investment is inappropriate in the first place if their timescale is short. Taking a longer term view we see that Property funds by and large give us a positive return over plus five years and are not correlated to equities, and so can be a valuable addition to a diversified portfolio.
But that’s not really much of a story is it!