In an earlier blog The need to diversify I wrote about my investing philosophy and my strong feeling that you need to spread (or ‘diversify’) your money across the various asset classes- Cash (savings accounts), Equities (the stock market), Corporate Bonds (Company IOU’s), Gilts (Government Bonds), Commodities (Gold) and Infrastructure (PFI projects such as road building, hospitals, Defence facilities etc).
The other main asset class that I think is very important to have money in is Commercial Property. Why?
Well, to begin with, it is important to understand what this asset class actually is. Another of my investment mantras is “Don’t invest in anything that you don’t understand’! It is investing in funds (usually a Unit or Investment Trust) that themselves invest in offices, retail parks and shopping centres with the aim of generating all-important income from the tenants (the fund company are in effect their Landlords, although they usually use managing agents for that role) as well as some capital gain from the value of the property.
This income and capital appreciation is then returned to its investors based on the proportion of their investment in it. Now commercial property has traditionally been important to investors ‘ portfolios as their value tends not to be driven by the vagaries of the stock market, but more of the general wider state of the business economy (if the economy is booming more companies will want to expand and rent offices or open a retail unit for example), and how you value a set of offices is not the same as how the market values companies. As an illustration, if you look over the last 12 months, the FTSE All Share Index which represents the wider UK Stock Market has suffered a loss of 6.9%, however those funds that invest directly in property, rather than through property shares (a different beast entirely) have done much better with returns over the same period of around 3%.
For me, the real attractions of commercial property is that you are now getting a very healthy yield (income) that compares very favourably with what you can get in savings accounts and also equity stocks. A personal favourite fund of mine is the Foreign & Commercial Property Trust or more commonly known as simply FCPT
It is an investment trust which means that it is an investment company traded on the stock market so you can invest in it either via a stockbroker service or direct through a very cost effective savings plan.. ‘Foreign & Colonial’ are a very well known fund management company having started the first ever Investment Trust way back in 1868. The fund itself is managed by Richard Kirby and at present has around £960m invested- quite a considerable amount.
Its performance over recent periods is very impressive – having returned 65.7% over the last three years (although like other property funds it has been more turbulent over longer periods) and the current yield it pays is a very attractive 5.9%. One of its other attractions is that it is one of the few property funds that pays out a monthly income which can be very attractive if you are reliant on that kind of income, to perhaps supplement a pension or salary.
It currently has around 40% of its money invested in Offices, around 27% in Retail (shops etc) and nearly 20% in warehouses. Around 70% of its properties are in London or the South East in places like the Newbury Retail Park and Wimbledon Broadway etc.
Funds such as FCPT are to my mind very attractive- they offer a high level of income, they are generally less volatile then conventional equity funds, but still offer some potential for growth. That’s not to say that they would not suffer in any euro zone meltdown of course but on the risk scale they do have some protection and certainly as part of a sensible, well balanced portfolio it could be a good fit.