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.
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