There are a number of things advisers can do for their clients and clients can do for themselves to mitigate the risk in the unlisted property sector, according to industry spokesmen.
Century Funds Management (CFM) managing director John McBain emphasises that in all cases the risks that will lead to the failure of a fund are there to be found right from the inception of the fund.
He said CFM has returned an average annual 17 per cent in total returns over the past five years, and we have never lost anybody’s money, by following a strategy that “risks don’t suddenly emerge to cause a fund’s failure”.
He advises planners looking to invest in the sector to pick two or three managers that seem to have a good track record in specific sectors.
“Avoid fund managers who proclaim to be experts in everything, those offering funds across multi-assets.”
McBain also advises planners to “invest some of their time on behalf of your clients with the prospective fund managers. It’s no good just picking up an independent research report and saying that looks good — because they all look good”.
“Go and visit the manager, go through his operation, make him introduce you to the senior executives, and see what his processes are, and check his compliance.
“Also, if you are going to take a major allocation in a product, go into the fund office and get every document, every lease, every contract, every independent valuation, every building services report, on the underlying property.”
Planners should also ask the managers if they will take them to physically inspect the asset, and, of course, do a detailed check of the fund’s performance.
Finally, once you have done all those things, make your own summaries of the risks involved and transmit them to your staff and on to your clients.
PIR Independent Research Group director Mark Wist said that while a track record can be important, a successful fund might actually be a new fund and have no track record to speak of.
“However, the individuals managing the fund might have years of experience that can drive fund performance, regardless of a lack of a track record.”
The recently formed Eureka Funds Management, for example, has no track record to speak of but is currently attracting billions in funds under management on the basis of the founders’ market reputation, he said.
Tony Pitt, founder of boutique fund 360 Capital Group, said it’s essential to look at the manager’s actual experience in managing direct property funds.
Secondly, planners and investors must look carefully at the underlying assets in the fund, and the amount of financial structuring that has gone into that vehicle.
