Hambidge (pictured) has held infrastructure funds for a number of years in his £254m, five crown-rated Premier Multi Asset Distribution fund, but has sold out of the asset class over the past six months and bought property funds instead.
The manager says that property is at an early stage of its recovery, which makes it a good time to buy in, while rental yields give investors a cushion against rising rates.
Performance of sectors and index over 3yrs
Source: FE Analytics
“Our biggest change over the last few months has been property – we have been buying into the UK property sector, bricks and mortar funds,” he said.
“That has been at the expense of equity and bonds and more significantly out of infrastructure plays on valuation grounds.”
The manager says that one issue facing the sector is the prospect of rising interest rates. These would push bond yields up and reduce the relative attraction of infrastructure funds.
With the sector sitting on an average discount of 12 per cent, the scope for a de-rating is high.
“A lot of assets are priced for low rates,” Hambidge said. “Having said that, we believe that rates will be low for longer. Even if they pick up in 2015, it will be by less than in previous cycles.”
Iain Scouller and Alex Cass, investment trust analysts at Oriel, agree that investors need to keep an eye on interest rates.
“Investors do need to keep a close eye on bond yields, although we still think the sector can withstand a rise in the UK 10-year benchmark yield to 3.5 per cent and maybe even 4 per cent, without major impact,” they said.
The 10-year gilt reached 3.07 per cent in late December before retreating back down to 2.7 per cent in the recent market pullback.
The analysts, as well as Hambidge, note that new issuance over the last year has helped to reduce demand for the high-yielding sector, although premiums remain high.
Oriel rates 3i Infrastructure and Bilfinger Berger as “sells” on valuation grounds, HICL is rated a “hold”, up from “sell” after recent share price falls, while International Public Partnerships and John Laing Infrastructure are both also rated “holds” on valuation grounds. No fund is rated a “buy” by the team.
Hambidge’s concern is more about valuation, he explains, which is why he has been shifting into property funds including SWIP Property and Henderson UK Property.
The manager is focusing more on commercial property and is avoiding London assets just like Fiona Rowley, manager of the M&G Property portfolio.
The best valuations are outside the capital, he explains.
“Outside London, property hasn’t joined the party yet,” he said. “We don’t like London property. It’s a classic quality asset versus price debate. Shops on Oxford Street are quality assets, but it doesn’t mean there’s no limit to what they are worth.”
“We are much more interested in commercial property outside London. We have seen a dramatic recovery in closed-ended funds.”
“We are starting to see some rental growth outside London. It isn’t like fixed income in which valuation is very tied back to rates. The yield on property is very attractive, so it’s got better cushion than other income-paying assets.”
Hambidge and his team started buying into SWIP Property last summer and have also added Henderson UK Property.
Both have had strong years, beating the sector average despite investing in bricks and mortar, traditionally slower to grow than funds that buy the shares of property companies.
Performance of funds vs sector over 1yr
Source: FE Analytics
Both funds are open-ended, which is a controversial choice. Many investors avoid open-ended funds for property because of the issues of liquidity they are prone to.
As it is hard to sell property quickly, when many investors want to remove their money from a fund, the managers can end up selling their best assets at low prices. To avoid this they typically keep high cash weightings, which can hinder performance.
“Commercial property is a hideously illiquid asset class,” Hambidge admitted. “But there isn’t a perfect way to access it: with closed-ended funds, you have the discount volatility to worry about.”
This is one of the reasons why property funds suffered so badly in the 2007 and 2008 sell-offs, with the sector falling 40.32 per cent over the two years compared with 26.2 per cent from equities.
Performance of sector and index 2007 to 2008
Source: FE Analytics
Hambidge notes that he had no money in the open-ended funds at the time of the bubble.
The manager says that the sector has momentum behind it, with a lot of investors returning, which makes it a decent bet for 2014 at least. He adds there is still plenty more to come from this recovery story.
“You can see from fund flows data a lot of money is going into commercial property very steadily,” he said.
“Normally we would avoid momentum trades, but it’s so early in the cycle and valuations are attractive for you to run with in 2014.”
“The danger is that valuations move up at a very comfortable pace. We do see that as an issue over the next 12 months.”
Premier Multi Asset Distribution is top quartile in the IMA Mixed Investment 20%-60% Shares sector over one, three and five years.
It is currently yielding 3.8 per cent and has ongoing charges of 2.24 per cent.
