Evan-Cook says the reason why most investors underestimate property funds is because they do not properly account for rental income.
“We’re not trying to hit a six, but you’re going to make a fairly similar return from UK equities as are you are from commercial property factoring in rental income,” he said.
The manager also says that the risk/reward ratio is firmly in investors’ favour with property, which cannot be said of equities.
“If you run the price chart of the IPD index of all UK commercial property, it is the same as it was in 1999, which is a lot less than it was in 2007,” he said.
“But if you look at the total returns chart it looks healthier and like it’s had a recovery, but price-wise it’s still very close to 2008 trough levels.”
“And unlike most assets that had that rise and fall, property prices have stayed the same whereas UK equities have risen.”
“This is very interesting to us because that gives us some reassurance that a fall in property prices of 30 per cent is unlikely – you can’t say the same about UK equities.”
“So that being similar, UK commercial property prices are lower and looking less susceptible to a correction,” he added.
FE Alpha Manager Evan-Cook co-manages the £254m, five crown-rated Premier Multi-Asset Distribution fund alongside Ian Rees and David Thornton.
The fund has made 30.64 per cent over three years compared with a sector average of 13.49 per cent.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Evan-Cook says he has a high conviction in property, which has been quite a sudden move for him.
He adds that the diversification advantages the asset class offers are a side effect rather than his main aim.
“We are generally quite glacial in our approach, but we’ve got heavily into commercial property over the last six months from previously holding no open-ended direct property funds whatsoever,” he said.
“We appreciate the fact that it diversifies us away from many risks that are specific to bonds or equities, although it has its own set of risks that we naturally need to be aware of.”
Despite his high conviction, Evan-Cook warns that investors need to be selective in their fund choices.
“You can’t just go and buy into the index and expect it to be great, because there are some poor quality secondary properties out there in places that will never recover,” he said.
In particular, the manager is wary of high streets and pricey central London property.
“Like any index, you’ve got some bits that are expensive and some that look very cheap, but in the middle there is some good stuff.”
“With the UK economy looking a lot healthier, secondary property outside of London with some decent asset management in an OK shopping location is attractive.”
“That sort of thing can add value again and offer a reasonable return, but it’s not an investment where we expect we can make a 20 per cent return.”
The manager’s largest exposure to the sector has been through two funds: Henderson UK Property and SWIP Property Trust.
The funds have made 17.36 and 12.02 per cent respectively over the past three years, according to data from FE Analytics.
Performance of funds vs sector over 3yrs
Source: FE Analytics
Evan-Cook is not the only leading fund manager to go back into property recently.
Henderson’s head of multi-asset, Bill McQuaker, told FE Trustnet he was ditching bonds to buy back into property as mass intervention from central banks combined with historically low interest rates made fixed interest poor value.
It is not a sentiment shared by Psigma’s Tom Becket, who is staying well clear, as he outlined in a recent article for FE Trustnet.
“I am vehemently against the illiquidity of bricks and mortar funds and their swingeing fees,” he said.
“Memories of 2007 and the gated funds loom large in my memory and I have seen little to suggest that the inherently illiquid nature of UK property funds has ameliorated.”
Open-ended commercial property funds suffered greatly during the financial crisis as capital flight took hold and managers found themselves having to give big discounts to unload bricks and mortar investments.
Performance of sector 2007 to 2010
Source: FE Analytics
For Evan-Cook, however, the opportunity comes when managers take a very different view to the market consensus.
“When it gets to the point where everyone thinks commercial property is the bees’ knees’, that’s when we’ll think again,” he said.
