IPD: Specialist pooled funds outperform by 400 bps (UK)

Specialist pooled property funds outperformed the IPD UK Pooled Property Fund Indices benchmark by 400 basis points in 2010, with a strong annual total return of 18.8%.

Balanced funds performed less well but also emerged with a double-digit return for year 12.2%, against the All Pooled Fund Index average of 14.8%, which outperformed the direct property market by 30 basis points, as measured by the IPD UK Monthly Index. The IPD UK PPFI performance was significantly stronger than the 2009 total return, which was -5.4%.

Specialist funds owe their strong performance last year to a combination of: a structural bias in favor of parts of the market which delivered better rates of return, in particular central London offices; strong individual asset performance within specific areas of the market, such as shopping centers, and; the positive influence of leverage in rising markets. The gross loan-to-value ratio for specialist funds was 33.7% at year-end.

Indeed, the four of the seven sector-specific City office funds in the databank outperformed the PPFI specialist fund average by at least than three percentage points, while five of the seven shopping center-focused funds outperformed the PPFI specialist fund average.

By contrast, balanced funds have more geographic and sector spread in their portfolios which contributed to more muted performance. Balanced funds' gross loan-to-value ratios are also much lower, at 4.2%.

Across the entire IPD UK PPFI - sponsored by The Association of Real Estate Funds (AREF) and Linklaters - the spread of returns was 51.5 percentage points from best to worst performance in 2010. Of the 59 unlisted funds, only one recorded a negative total return, while only eight others delivered investors a less than double-digit annual total return, reflecting a general improvement in property fundamentals.

The databank is comprised of 25 balanced and 34 specialist quarterly-valued funds, worth a combined net asset value of £27.9 billion at the end of 2010. Balanced and specialist funds delivered 1.9% and 4.0% over the final quarter of 2010, while the all pooled fund average was 2.7%.

The average gross loan-to-value ratios has fallen by almost five and a half percentage points - from 24.1% at December 2009 to 18.6% at the end of last year. This is also more than 10 percentage points lower than two years ago when gross LTVs in the UK PPFI were 29.8%.

"Around 40% of UK pooled funds matched or beat the performance of the underling property market in 2010, while a further 45% of funds delivered double-digit returns. So it was a solid year for UK unlisted funds. Those that outperformed owe their success to three factors: asset management, favorable structural bias and the positive influence of leverage. There is, though clear a trend towards de-leveraging across the board," explains Phil Tily, UK and Ireland Managing Director at IPD.

Asset class comparisons and longer-term performance
UK pooled funds outperformed equity markets by 30 basis points, at 14.5%, as measured by the FTSE All Share Total Return Index, after a substantial final month rally in equity markets. Both pooled funds and equities classes outperformed bonds, which delivered investors 9.1%, as measured by the FT Gilts 5 - 15 Years Index.

Pooled funds returned -9.6% over three years, -3.6% over five years and 4.9% over the last decade.

Source: IPD

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