Robust performance puts funds of non-listed real estate funds back on track

Non-listed real estate funds of funds recorded total returns of 8.0 per cent in 2014 – the highest since 2007 and a massive rise from 2013 when performance hit just 0.2 per cent, according to the latest figures from INREV and ANREV.

The data from the latest Fund of Funds Study 2015 signals a strong recovery of the funds of funds industry, moving it back to prominence as a key area of interest for institutional investors, following much poorer performances over the previous eight years. The analysis also reflects a significant narrowing of the gap between the upper and lower quartiles performance, which reached 11.9 per cent in 2014 versus 21.5 per cent in 2008, indicating lower volatility in the funds of funds market.
Global funds of funds delivered the highest returns for 2014 at 11.9 per cent. Returns for funds of funds targeting non-European markets rose to 9.8 per cent, the highest since 2011, while those with a European strategy rose significantly recording a total performance of 5.2 per cent – a huge jump from the -5.1 per cent achieved in 2013. Funds of funds focused on the Asia Pacific region trailed other regions, with returns at -3.3 per cent in 2014.
Catriona Allen, Fund Manager at Aviva Investors Global Real Estate Fund of Funds, says: “Global funds of funds have a wider universe of potential funds to invest in, giving greater opportunities to select managers they perceive to be the best in their class, and so able to deliver superior returns. They are also able to access sectors and regions at different points of the investment cycle, avoiding potential downturns in one region in favour of other preferred opportunities.”
Closed end funds of funds outperformed their open end counterparts with total returns of 8.9 per cent and 7.8 per cent respectively, continuing a trend that has been consistent since 2009.
The study also reveals a clear distinction in performance and return expectations of different funds of funds styles. In 2014, core funds of funds delivered returns of 8.8 per cent versus 5.4 per cent for non-core. And on average in 2014, core funds of funds invested in 13 managers compared with 7 for value added funds of funds and 8 for opportunity funds of funds with correspondingly varied average target IRRs of 8.5 per cent, 12.6 per cent and 14.9 per cent respectively. This reflects the diversification benefits of funds of funds for investors.
Other data from the study highlight an impending transformation of the funds of funds industry with 39 funds due to terminate within the next 10 years. This represents EUR2.7 billion, or nearly 10 per cent of the current total NAV being removed from the industry, and potentially seeking redeployment. A peak of 11 terminations is anticipated in 2019 equating to EUR1.1 billion or 11.6 per cent of total NAV; this still leaves 23 funds of funds with open-end structures and no specified termination.
“These results are impressive, particularly in the context of earlier anaemic performances. They are a clear indication that funds of funds have regained their mojo.
“As with other products in the non-listed space, there is change afoot with some funds of funds reaching maturity within the next decade. However, these statistics should go a long way to restoring investor confidence in the diversification benefits of funds of funds and renew their enthusiasm for these vehicles as part of a balanced allocation to non-listed real estate,” says Henri Vuong (pictured), INREV Director of Research and Information.

Source: Property Funds World