Aim: Growth by investing globally in property securities including real estate investment trusts
Minimum investment: Lump sum £1,000, monthly £50
Investment split: 49% US 11% Europe, 11% Japan, 10% Australia, 9% Asia, 10% cash
Isa link: Yes
Pep transfers: Yes
Charges: Initial 3.5%, annual 1.56%
Commission: Initial 3%, renewal 0.5%
Tel: 0800 414181
Fidelity has brought out a UK Oeic version of the offshore Fidelity global property fund. The new portfolio will contain similar holdings in Reits and other property securities around the world, but the annual management charge will be taken from capital rather than income and there will only be an accumulation share class.
Hargreaves Lansdown senior analyst Meera Patel suggests that one of the mains attractions of this fund is that it offers a total return comprised of an attractive income yield together with capital growth prospects. “This combination makes it a suitable product for investors seeking this type of return. Fidelity estimates that a realistic total return from Reit funds is likely be in the region of 7-9 per cent a year. It is also worth noting that the fund does not distribute any income as only accumulation units are available.”
According to Patel, a useful feature of this fund is that it offers diversification benefits away from equities and bonds. “However, it is worth noting that while Reits in general do offer some diversification benefits, the reality is that they are linked to the equity market and if equities slumped, there is little to suggest Reits wouldn’t fall in value. So it is questionable to what degree the correlation exists.”
While Reits s are a new asset class in the UK and not available until 2007, Patel points out that they date back to 1960 in the US and have also been widely used in Australia since the 1970s. “The most common feature of Reits is their exemption from tax on corporate earnings and capital gains on eligible real estate activities. In return for these tax breaks, Reits are required to distribute the majority of their profits in the form of dividend payments to shareholders. While these are tax efficient for the actual companies, investors also benefit from receiving dividend payments,” she says.
Patel observes that there are other conditions imposed on the structure of Reits in return for their tax advantages. “For example, some Reits have limitations on the amount they are allowed to borrow. These conditions are in place to ensure these companies are conservatively managed and can deliver consistent dividends to investors. These caveats are likely to make Reits attractive investments for many investors in the UK,” says Patel.
Fidelity’s large resource base is another competitive advantage for the firm in Patel’s view. “The lead manager, Steven Buller, has been covering the Reits market since 1997 and he is supported by a global team of property analysts. As more Reit funds launch in the UK, competition will become stiffer and only time will tell if this fund is likely to buck the trend and deliver outperformance,” she says.
Patel thinks there are few drawbacks to this product and regards the concept as fairly sound overall. “The only real downside to this fund is that Fidelity does not offer income units. However, it is offering a withdrawal facility where investors can set the limit of income they want to take and can have it paid monthly or quarterly for no extra charge,” she says.
Patel explains that the risk here is that the investor chooses an income level that is higher than the actual income paid into the fund, and this could effectively eat into the capital. “Investors therefore need to take extra care if they go down this route and be realistic about the returns they are likely to receive,” she says.
Another point Patel makes is that this fund invests in property securities, this means it will be more volatile than investing in a pure bricks and mortar fund, so investors need to bear this in mind when looking at Reit funds and their suitability to invest.
Scanning the market for likely competitors, Patel says: “The main funds which will provide some competition include Sarasin global Property, Skandia global property securities and the Franklin global Reit fund. Of course, over time competition will only grow fiercer as more Reit funds are launched in the UK,” she says.
Patel concludes that a lot of Reit funds claim to be highly liquid as they are invested in the securities of companies rather than actual bricks and mortar. “While this is largely the case, we cannot ignore the fact that the underlying businesses of Reits are tied to physical property,” she says.
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average