The headlines are all about falling UK house prices, but the UK commercial property market is in an even worse state. Capital values fell 4.5% in the first quarter of the year, says property adviser CB Richard Ellis, which has left even the best-performing funds in the sector struggling. One of the most popular unit trusts, New Star Property, is down 20.7% over the past 12 months, while the top performer, CF Canlife UK Property Jersey, fell 2.7%.
It just goes to show that, as recent research from fund manager T Bailey suggests, when a downturn arrives, you’re better to sell out of a market entirely rather than put your faith in even the most skilled manager. Taking the performance of funds in different sectors, T Bailey found that in four of the past five years, the performance of the very best fund in the year’s worst-performing sector didn’t beat the worst fund in the best-performing sector, showing that asset allocation is far more important than picking the right manager.
For example, last year the top sector was Asia ex-Japan Equity. The worst fund in this region returned 16%, against a 71% return for the best – Gartmore China Opportunities. In contrast, Japan was last year’s worst-performing region, where even the best performer, Fidelity Japan, lost 2% of its value. “Simply, if you allocate your assets to the region that performs well, then even if the fund disappoints relative to its peers, much of the returns will be captured”, says Jason Britton in The Daily Telegraph.
“In fact, around 90% of investment success depends on getting the asset allocation correct”, says Justin Urquhart Stewart in The Sunday Telegraph. So how can you choose the right one? Well, one idea is to scour the previous year’s worst performers – this is often a sign that things could be set for a turnaround, as we believe may be the case with Japan.
So what about UK commercial property? It’s certainly performing badly – but with a glut of office space coming on the market and the credit crunch making it nigh on impossible to borrow, don’t go looking for a bargain just yet. Funds may have had a torrid year so far, but property derivatives prices suggest that British commercial property values have a further 11-12% to fall in the remaining nine months of 2008, says CB Richard Ellis. So things look set to get a lot worse.