Here at Informed Choice we are busy this week preparing our Investment Outlook report for the third quarter of 2011.
Within this quarterly report we share our House View on the various investment asset classes.
This House View puts us in a strong position to make tactical adjustments to the portfolios we create for our clients, aiming to take advantage of market and economic opportunities in the future.
As we develop our Investment Outlook this week, we have interviewed George Shaw, manager of the Ignis UK Property fund. This is one of the funds we hold within our model portfolios and it is useful to get opinions from the various fund managers as we form our own House View.
George graduated from Heriot-Watt University in 1990 with a BSc in Estate Management. He joined Ignis Asset Management’s property team in December 2005.
George is the lead manager for the Ignis UK Property Fund and a member of the Royal Institute of Chartered Surveyors.
Following the recent raft of High Street failures, we were keen to find out to what extent the Ignis UK Property fund was exposed to the retail sector.
IC: What impact (if any) do the latest High Street closures (Habitat, Moben Kitchens, etc) have on the fund and is the death of the High Street an important consideration for the future allocation of holdings?
GS: The Fund has a retail exposure of 48.8% vs a benchmark of 45.2%. The Fund isn’t exposed to the named tenants but has some exposure to a number of retail tenants (both in-town and out-of-town) who have encountered difficulties this year.
The Fund’s assets are predominantly prime and therefore where tenant failures are encountered we are confident in being able to replace the income quicker than the average.
We also wanted to know about the impact of continued low interest rates on the commercial property sector:
IC: Has the historically low Bank Rate fed through into the cost of financing commercial property transactions in the UK?
GS: The banks continue to have a historically large exposure to commercial property. The recent significant issues in the banking sector have lead to an overall more cautious approach to lending and a balancing of loan books – therefore the low interest rate has had little impact on the cost of financing property transactions in the UK.
Continuing with the theme of cash and interest rates, we asked about the drag on yield performance from the cash allocation within the fund:
IC: Does a cash holding create a drag on yield in this current low interest rate environment, or is this level of cash important within a property fund at this time to manage current/expected redemption volumes?
GS: The Fund’s cash rate at the end of April as per the Quarterly Update is 28.6%. The returns that can currently be gained from cash are obviously less than property and therefore create an element of drag.
Our initial aim is to reduce cash to 20% then 15% whilst carefully monitoring flows in order that a liquidity balance can be maintained.
Finally, we asked about the regional differences in property market performance, as they applied to the fund:
IC: Does your focus on London and the South East increase the risk profile of the fund when compared to a more geographically diverse property fund?
GS: We currently have a 60% exposure (by value) to London and the South East which we consider to be a positive but not disproportionate position. In the current economic climate we consider a fund with less London & South East has a higher risk profile.
We are very grateful to George and the business development team at Ignis for taking the time to provide these answers.
As soon as our latest Investment Outlook report is published, we will make it available to download here.
Photo credit: Flickr/gigijin