Hybrid property gets a wrap

Melbourne-based research house Lonsec has delivered an upbeat assessment of hybrid property products.

“High-yielding direct assets with liquidity have long been seen as the ‘holy grail’ of property investment, and we believe that hybrid property funds squarely meet these investment criteria,” said Lonsec senior researcher Pete Morrissey.

“Hybrid property fundamentals of strong income with low volatility appear well suited to a wide range of investors, with the asset allocation decision (direct or listed) providing an additional level to assess management skill,” he said.

Eight hybrid property funds have appeared in Lonsec’s inaugural review of the emerging unlisted funds sector, which it claims is the first review of its type by an independent researcher.

A “proliferation of hybrid property products in 2005 provided an expanded universe against which to undertake the first peer review of this evolving sector”, Morrissey said.

The funds included in the review would provide financial planners with an “array of quality funds having a diverse range of investment attributes and processes to furnish individual client requirements”, Morrissey said.

The Lonsec Hybrid Property Index has been created to conduct the reviews, based on a 50 per cent weighting to the S&P/ASX 200 Property Trusts Accumulation Index, and a 50 per cent weighting to the Mercer Unlisted Property Funds Index (net of fees).

Lonsec’s analysis indicates that the variation in risk and return for direct and listed property “can be significant” when compared to Lonsec’s Hybrid Property Index, Morrissey said.

“There is therefore a strong case for investing in hybrid property on a risk-adjusted return basis relative to the pure forms of direct or listed property.”

Lonsec’s ratings assessment includes both qualitative and quantitative factors, notwithstanding the limited history of most funds in the review, which are scored separately and combined to determine an overall rating.

Qualitative factors include the strength of the investment process, research methodology, experience of the investment team, compliance, portfolio construction and business strength.

Quantitative analysis draws on a fund manager’s past performance, with Lonsec applying a range of measures to assess both risk and return.