What to buy, what to sell: property pitfalls and special situations

Property fund pitfalls

Property funds have overtaken bond funds in retail sales, according to the secretive Pridham report, says Citywire, representing 21% of sales in the first quarter of 2006. And as Darius McDermott, MD of Chelsea Financial Services, states in the FT, the high uptake reflects investors' willingness to diversify their portfolio, "while getting exposure to an asset class that has done very well over the last ten years".

However, as several financial experts warn, there is a danger that investors are buying "into funds that they don't understand", says Tony Lanning, director of research and investment at Origen, also in the FT. For example, investors have begun pouring money into global property funds without considering currency risk. "There are a number of dollar-denominated funds that are not hedged and people still think they are low risk," says Lanning, "just because they see the word property."

Prospective investors should, therefore, take several steps before buying into property funds. Look closely at charges, minimum investment levels and liquidity restrictions so that you know if there will be any obstacles to getting your money back. You should also look at the investment breakdown of each fund, says Sharlene Goff in the FT, as some focus specifically on bricks and mortar, while others "invest in the shares of property companies and others offer a hybrid."

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Also, look for a fund manager with proven experience. "The weight of money going into the sector could push prices up so it is all about the skill of the manager in selecting the right assets," says McDermott.

RAB really is special

One highly experienced fund manager is Philip Richards. Nearly a year ago, MoneyWeek recommended buying into the commodities story via his RAB Special Situations fund which is listed on Aim as RAB Special Situations Company (RSS). Last year it also issued two warrants, which we also suggested investors should consider (RSSA and RSSB). The A' warrants are due to be exercised next week at 115p. As the shares are now trading at 131p, the warrants have done well in the last eleven months since we recommended them. However, just because they are about to be exercised doesn't mean that you should sell out you ought to be looking at a "two-to-three year investment in the fund", Philip Richards, the fund manager, told MoneyWeek. "We might be in a speculative bubble, but we are still in a secular up-wave." Collins Stewart agrees, "RSSA is currently trading at a 15% discount to the fund's net asset value... We continue to recommend RSSA on the basis of both the manager's impressive track record and the strength of the market for natural resources."