Torpedo trails

26 November 2009

Brian Tora’s Investment View

Should I be concerned about the rising emphasis placed by those promoting retail fund offerings on commercial property, I wonder?

I mentioned last week how the HSBC multi-manager guru went off piste to argue the virtues of this asset class in a conference dedicated to equity investment but he is not a lone voice. M&G have been hosting a roadshow to highlight the attractions of their fund run by Fiona Rowley. Property is back in favour, it would seem.

The arguments for investing in property funds centre on the attractive yields they offer. With some nervousness being voiced as to what may be in store for corporate bond funds should inflation return, advisers are switching out of this particular income-generator of choice and buying into property, where yields are at historic highs.

This approach will hold good, providing we do not suffer from a second downwave in the economy.

Given the level of Government indebtedness disclosed last week, a sluggish upturn looks the best we can hope for. As it happens, those not so far affected by the recession appear better off, according to a recent report from Cazenove. It seems that a combination of lower food prices and cheaper mortgage costs has driven up the amount of income available for discretionary spending by 20 per cent this year. It may not feel like it but we have more cash in our pockets.

However, we have actually been spending less. Household expenditure grew by an average of 7-8 per cent a year during the five years to 2008 - no wonder the level of personal indebtedness rose so much. But Cazenove estimates non-discretionary spending will fall by 6 per cent this year - the biggest retrenchment since the early 1990s.

In part, this reflects the persistence of tighter credit conditions but it must also be a consequence of consumer concern about the future.
What looks set to pull the UK economy out of recession this quarter is an accelerated spending programme as people buy big-ticket items ahead of the VAT hike due at the start of 2010. Indeed, pessimists will claim a higher rate may have to be introduced to help rebuild Government finances.

Given the effect this might have on any recovery, I rather doubt it will happen. But it all adds up to a tail-off in activity early in the new year, which may not be good for commercial property.

That said, the shakeout has been so severe that it is hard to imagine it getting much worse. At least the yields obtainable on commercial property now give some indication that value has returned. It is just that I have some concern that a fresh flow of money into these funds could drive prices up, as it did a few years back, before the fundamental case had been re-established.

In the end, it is important to retain a sense of proportion. At the Cofunds’ conference, HSBC’s Guy Morrell pointed out it had been relatively easy to spot the funds likely to be in trouble in a downturn.

A chart he displayed demonstrated how they had avoided those which had imploded - what an ex-colleague of mine might have described as “torpedo funds”, or those likely to hole your performance below the waterline. So perhaps the case does exist. Be careful, though.

Brian Tora (brian.tora@ centaur.co.uk) is principal of the Tora Partnership

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