Emma Wall: Hello and welcome to the Morningstar Series 'Ask the Expert'. I'm Emma Wall and I'm joined today by Randal Goldsmith, Senior Fund Analyst for Morningstar.
Hello Randal.
Randal Goldsmith: Hi.
Wall: So there has been quite a lot of news about the commercial property fund sector. But of course it's not just people who hold shares in commercial property funds that have exposure to this sector.
Goldsmith: Yes.
Wall: Multi-asset funds hold the sector as well, don’t they? I thought perhaps you could highlight the multi-asset funds with the largest exposure to commercial property.
Goldsmith: Well you are absolutely right Emma. I think though the key thing that needs stating at the outset. Is that it's specifically open-ended funds that invest directly in property that are the issue. Multi-asset funds can get exposure to property by way of REIT funds. They can get exposure by way of closed ended structures.
But it's specifically the open-ended directly invested property funds. Where you've had the issues of suspensions of redemptions to investors. Now of the funds that we rate there is really just Premiere and Jupiter that have got exposure to directly invested open ended funds.
Premiere actually had very significant exposure to property over 20% in two of its funds, the Multi-Asset Distribution and Monthly Income funds. However, it has been reducing it significantly over the past 18 months down to about 10% now and that 10% is actually a mixture of REITs, closed ended structures and direct invested. I would say that later is only about 5% in the Premiere multi-asset funds now. and basically ahead of what's happened they've got out of the funds that have suspended.
For Jupiter the exposure has always been smaller. They've got it in two of the funds in the Merlin range that’s the Merlin Balanced and Merlin Income funds. In each case it's none of the funds that have suspended, it's their own dedicated vehicle. It's only 3% of the portfolio.
Wall: You mentioned there about how Premiere have been reducing their exposure and I think that’s a very important point. It's happened across the multi-asset range not just the ones that we rate highly here at Morningstar. Because even before Brexit this was a sector that was looking very toppy.
A lot of people were looking at commercial property and thinking well 2016 is not going to deliver what we were able to get out of commercial property in terms of total return from 2015 and from 2014. So is that something that you have seen across the sector that people have been reducing that exposure.
Goldsmith: Yes. I think that’s been happening generally. But we're monitoring most closely the funds that we rate and it's important to monitor exactly how a fund gets its exposure to property.
Wall: And of course even if a multi-asset fund is invested directly in some of these open ended commercial property funds that have had suspensions. It's not a concern for the multi-asset investor in the same way it might be for someone who holds those funds directly is it? Because multi-asset fund managers of course have actual liquidity that they can pull from different parts of their portfolio.
Goldsmith: Well of course that depends on exactly how much the multi-asset fund has invested in property. I think the key thing with property and the whole idea of investing in property for diversification of risk. The issue with it is it's very difficult to quantify. Properties, it's a great idea at times when it's undervalued to improve the returns of a multi-asset fund. But as you say it had been getting overvalued sometime before the Brexit vote and to hold it just for diversification purposes. It's an issue because it's difficult to quantify, measures like standard deviation they don’t really have the same meaning for property.
I think for investors looking at multi-asset funds and their exposure to property you can't quantify it, but what you should watch out for is for property becoming the dominant risk in the fund. Because when property becomes a dominant risk maybe you could take a rule of thumb here like, something like 20% to 30% above that level than the problems faced by the underlying property funds. They can become the problem for the multi-asset fund itself.
Wall: Randal, thank you very much.
Goldsmith: You are welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
