In an article published earlier this week, FE Trustnet took a look at which assets have been best for income generation and found that equities came out on top, having delivered dividend growth as well as greater pay-outs.
This may come as a surprise to many investors, as property funds have becoming an increasingly popular area of the market due to their yield credentials – as well as their low correlations to bonds and equities.
Indeed, chief investment officer Lee Gardhouse said that he won’t use bricks and mortar in any of his income portfolios as he believes the asset class is a lacklustre income play.
Certainly, one headwind that direct property funds faced last year was that many of them had high levels of cash on their balance sheets as investors have piled into the asset class and this has therefore led to a drop in dividend levels.
However, the popularity of the property sector still hasn’t dwindled, with many investors buying into direct property funds as a means of portfolio diversification or as an alternative to bonds.
Using data from FE Analytics, we have delved under the bonnet of the direct property sub-sector and taken a look at which funds have provided the largest growing income streams over the last five years without relying on capital appreciation.
Best performing property funds on £10,000 between 2011 and 2015
Source: FE Analytics *Figures based on a £10,000 investment in January 2011
Based on an investor putting £10,000 into each fund in January 2011 and holding it for five years, the research shows that Canlife UK Property Jersey has delivered the highest return, with the initial investment growing to £20,253 by the end of last year.
However, when looking at its income distributions in isolation from its total return over the last five years, it has actually paid investors a below-average level of income for the subsector at £1,618, suggesting the fund has been focusing its efforts on delivering capital appreciation more than dividend pay-outs.
Performance of fund vs subsector between 2011-2016
Source: FE Analytics
The £57m fund has been headed up by Michael White since its launch in 2005, and has outperformed its direct property composite significantly over one, three, five and 10 years with a concentrated portfolio of 13 holdings.
Almost half of the fund is invested in offices and its largest regional weighting is in the South East at 44 per cent, although it does also have smaller weightings in the Midlands, Central London, Scotland, the South West and the North East.
In contrast, Threadneedle UK Property has delivered a below-average lump sum return of £12,880 between 2011 and the end of 2015, yet has managed to provide a dividend of £2,352 over the same time frame, which is £446 more than the average direct property fund.
It is also the only one of the 18 direct commercial property funds with a long enough track record to have grown its dividend each year consistently since 2011.
Threadneedle UK Property’s dividend history
Source: FE Analytics
The £1.4bn fund, which is managed by Don Jordison and Gerry Frewin, has underperformed its IPD UK Property TR benchmark over one and three years but has nevertheless beaten its average peer in the broader IA UK Property sector over these same time frames.
While all funds in the direct property sub-sector are producing both positive overall returns to investors, it seems that some are better than others at striking the balance between generating attractive levels of income and strong capital appreciation.
The Charities Property fund is a good example of an investment vehicle that has managed to do this, having achieved the third-highest lump sum return of £15,678 on an initial £10,000 and the second-highest income pay-out over five years of £2,477.
The £1.1bn fund is the original and largest tax-efficient property vehicle that is available to all UK charities and is a CIF (common investment fund) regulated by the Charity Commission.
Compared to its direct property composite, it has outperformed over one, three, five and 10 years and delivered an annualised income stream significantly higher than its peers in 2011, 2012, 2013 and 2014, although it did deliver a below-average income last year which was almost half that of its composite average.
The Charities Property fund is one of just two funds in the composite to have delivered both an above-average lump sum return and isolated income stream over five years. The second is Threadneedle Property, which is headed up by Chris Morrogh and has outperformed its average peer lump sum by £559 with a total of £14,832 on an initial £10,000.
It has also achieved an income over five years of £2,443, which is £537 above-average.
Another metric that investors could look at within the direct property sub-sector is yield – while this is not necessarily an efficient way to judge a fund’s long-term income potential, it still plays a part in the income puzzle.
The historically low yields that can be seen across a number of direct property funds at the moment demonstrates just how well the asset class has performed over recent years.
The direct property fund with the highest yield though is Mayfair Capital Property Income Trust for Charities at 5.94 per cent – it should be noted that, out of the 17 funds, it has also delivered the highest isolated level of income over the last five years, distributing £3,068 on an initial £10,000.
Highest income paying property funds between 2011 and 2015
Source: FE Analytics *Figures based on a £10,000 investment in January 2011
The fund has been managed by FE Alpha Manager and Mayfair Capital founder James Thornton for more than a decade and over this time it has provided at total return of 66.15 per cent.
Its performance has largely been correlated with the IA Property sector since launch, although it boasts significantly lower annualised volatility over this time frame. Compared to its sub-sector composite, it has slightly underperformed and has done so with almost double the volatility and a significantly higher drawdown, partially as a result of its hard landing during 2008’s financial crisis.
The direct property fund with the second-highest yield is fellow charity fund The Charities Property, which has a yield of 4.65 per cent. This is followed by Threadneedle Property at 5.1 per cent, Threadneedle UK Property at 4.1 per cent and Standard Life Investments Ignis UK Property at 3.68 per cent.
