Don Jordison and Howard Meaney discuss the bounceback of property and the effect of QE
The past 12 months has seen a total reversal in fortunes for property funds. Ranked 28 out of 34 sectors in Jan 2009 for net retail sales, a late rally saw the property sector finish the year as the top-selling sector for three months running. Will this continue?
Were you surprised about how quickly property returned to favour from mid of last year?
Don Jordison (DJ): Yes, but I was also surprised at the policy response of the UK Government to the financial meltdown. It was absolutely titanic; we are all going to be paying for it for a very long time. But the policy response of the UK government in supporting financial institutions and the banks in particular, and their chosen preferred method of quantitative easing was the joker in the pack.
You could look at Japan 20 years ago when they had all the impaired property debt and their government did not act and they are still dealing with the problem 20 years later. In the UK, we did act – QE put a vast amount of liquidity into the system for risk assets and property as a risk asset became incredibly popular at an early point in the cycle. And it has all been about liquidity and that liquidity has arisen out of an unexpectedly positive Government policy response.
Howard Meaney (HM): I would agree it was exactly the right thing for the Government to do. Hopefully, we will recover from this a lot quicker than others may have thought we would. But actually I was not so surprised at the quick turnaround.
The property market had gone down by 44% – we saw a rally first in the equity markets, which have bounced by some 40% to 50% in 12 months or so. Property is a risk asset, but it still does have some bond-type characteristics and when income yields from property had reached 8%, it looked a reasonable and safe sort of buy, relative to other assets.
Are we at risk of getting to another bubble?
HM: I think so. History tells us when there is a big recovery in market prices, it is very often followed by a dip as things get carried away. The occupier market is looking a little bit uncertain and there is a lot of supply potentially coming into the market as banks look to unwind what they have got on their debt books. So there is undoubtedly risk.
Investors seem to be switching sectors more regularly than in the past. Does this force property funds to hold more in cash and dilute performance?
DJ: Well we perennially hold more cash than our competitors. In running open-ended funds, as an organisation, from the day they were invented nearly 40 years ago, we have got a lot of experience of the conundrum of investing in illiquid fixed assets in an open-ended structure. So we always keep a lot of cash.
Are people getting more itchy fingers in moving their assets around? Probably yes. And it is bringing more volatility and the manager has the responsibility to manage the risk of that. And the only way you can do it is through holding more cash.
HM: There is more movement around and people are prepared to change asset classes more frequently. We also hold UK property-related equities and some fixed interest investments, which are potentially more liquid than direct assets to give us that degree of flexibility, should we need it.
There were loads of launches and a lot of hype before the previous bubble. Have lessons been learnt from what happened?
HM: Somebody said to me the other day it was almost as if 2007/2008 had not happened, the sort of feeding frenzy that was taking place. Which leads you to think maybe the lessons have not been learned. I think what is important is if you are considering putting money into the market, you understand which fund you are putting your money into. And you appreciate what the manager’s style is and what the make-up of their portfolio is when he is being active in the market. Believe in the fundamentals of that house’s investment philosophy. The retail investor has certainly come back with some gusto.
With gusto and more knowledge?
DJ: There is some more moderation here that the flows we are seeing are not as powerful as they were in the last bit. They seem smoother and we get the impression they are part of an overall asset allocation strategy. What I am saying is people are not being silly and putting 50% or 100% of their net worth into a single property scheme. But there has been some pretty heavy carpet-bagging, taking advantage of the swing in the price.
HM: The difference now to three or four years ago is the level of debt in the market – that was driving prices down to unsustainable levels and the markets reacted accordingly.
How were you affected by the big sell-off in property.
HM: In terms of our retail fund, we launched in September 2007, which was just when the market was going into meltdown. We were sitting therefore on cash, watching values plummet. So we were one of the first recovery funds by default. It was not actually set up for that purpose. So we were able to buy through a market, which offered some good opportunities.
Inevitably, our values did fall but, since launch, I think against the IMA peer group, we are something like the first percentile. So the beauty of it was we were able to buy quality assets at what were discounted prices.
Don, how was your credit crunch?
DJ: In terms of reputation, we have had a very good one. But in terms of our business, if you take the Threadneedle real estate house as a whole, we met £1.6bn worth of redemptions out of an asset base of £6bn at the beginning of the downturn. We set out our stall to meet all our redemptions in full and keep all of our funds under management, retail or institutional open for business. Was it altruism? No. It was about maintaining our proposition, which is offering truly open-ended funds. And it was an investment in the future reputation of our brand.
So that is the big picture for Threadneedle. In terms of the fund, very similar to Howard’s story. Launched in 2007, we did launch it because we thought things would calm down and we could buy some good stuff at our kind of prices – we did not know the thing was going to go down by half. So we maintained 60%, 70% liquidity until we were confident prices had stopped falling and have since that time been converting cash into property.
How much exposure to commercial property is sensible for the average investor?
HM: Difficult question to answer because so much depends upon an investor’s strategy and an investor’s liabilities, and things of that nature. Across the board at LV=, we have got a weighting of something like 10% to 15% to UK property. And I hasten to add that is UK property – we do not invest overseas. Currently, we are at the top end of that weighting, we see property as a good short-term performer, relative to other assets. Balanced against that, you have got all the attributes of property – it does give a solid income return, it does give decent long-term returns and it does provide diversification.
DJ: The last time we did the maths and looked at an efficient frontier of property exposure – admittedly before this crash and the extra volatility we have noticed out of property – it always looked like 20%. But that, saying it quickly, does not build confidence. We generally say 10%, medium and long term, tops and tails a lot of the risk in your portfolio and puts some income in there as well.
How have the cash holdings in your respective funds changed over the past few months and why?
HM: We had quite a strong cash build-up towards the end of last year. Quite a lot of money invested with the fund doubling in size in Q4, and we have been able to reduce that down to just about 10% in cash now. That was reduced through investment primarily into direct property.
DJ: The Threadneedle UK Property Trust has increased in size over the past 12 months sevenfold. So we managed to fully invest the fund five times, except there is just a basic logistical lag with flows of that magnitude. And picking out the right kind of value.
We are very strict at Threadneedle, we are not going to throw money at the next opportunity which comes along. We could have this thing fully invested tomorrow if we wanted to, but it would not be in the right kind of property. And so yes, there is liquidity, there is pressure, but the pressure is to select the assets that do well over the medium to long term.
Don Jordison, Threadneedle. Howard Meaney, LV=
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