We are now in an era of “predictable volatility”.
That was the message stressed by the Financial Conduct Authority’s chief executive Nikhil Rathi at the regulator’s International Capital Markets conference in October. And it’s a situation that will colour clients’ decisions over the year ahead – including the asset classes in which they’re comfortable to invest.
The challenge for advisers will be creating and executing strategies that accommodate changes in clients’ appetite for loss but that also deliver the returns they need. And this will require using the full range of options at their disposal.
Commercial property is one asset class that’s not immune from volatility fears. survey conducted by Wesleyan at the end of last year found that nearly a quarter of advisers (24%) expect more than 40% of their client base to be put off investing in real assets– which includes commercial property – because of market volatility this year.
That said, it has long been a favoured asset with advisers because it is very much a tangible asset that clients can relate to.
And advisers will be aware of the benefits that it can offer. As an asset class, it isn’t strongly correlated to others like cash, gilts or equities, which helps to deliver all-important diversification and provides a degree of hedging against volatility when part of a mixed-class portfolio.
Clients can be nervous about investing in commercial property assets during periods of market choppiness
It also offers the opportunity for a relatively stable and predictable income through leases, on top of the chance for capital appreciation through growth in the value of the underlying property.
From a near-term performance perspective, eventual falling gilt yields and a gradual unwinding of interest rates are likely to boost property’s appeal, drive up transaction volumes, and, as a result, increase values.
However, as our research shows, clients can be nervous about investing in commercial property assets, along with other traditional assets, during periods of market choppiness.
From my experience, an underlying concern from clients invested in closed commercial property funds over the last decade has been about potential cashflow issues; the fear that they’ll be locked into an inflexible, illiquid investment, with no exit route to hand. This has been a real headache for clients locked into gated funds.
The good news is that there are options available that mean clients can still benefit from the upside of property as an asset class, with a greater degree of flexibility baked in.
Rather than invest in a closed commercial property fund, it might be better for clients to consider a multi-asset fund that invests in managing commercial property directly. In this environment, the liquidity as part of a portfolio is more manageable.
The fact that these funds are active owners of the underlying property asset means they can often divest from assets much more quickly than passive, closed property funds, offering investors greater liquidity during volatile periods and addressing their root concern.
Diversification is one of the most effective strategies against volatility
This contrasts with other investable property assets like REITs that very much behave like the wider equity market in times of market stress, when you want your property to step up.
At the same time, their multi-asset nature means that there is an inherent diversification built in. This means clients can benefit from the stability that commercial property assets offer in times of equity or gilt volatility and, likewise, balance during periods of uncertainty in property markets.
The most forward-looking property managers have also developed new areas of diversification within their property portfolios, to include everything from purpose-built car showrooms to EV charging centres and solar farms.
Advisers will be very familiar with the widely held conviction that diversification is one of the most effective strategies against volatility.
This sort of change can go a long way to maintaining ‘suitability’ in a changing environment and amid changing client needs.
Volatility isn’t inherently bad, but it can be a problem if it pushes clients away from investing in areas that would otherwise benefit their long-term goals – whether that’s commercial property or any other asset class.
Over the months and years ahead, the value of advice will once again be underlined as advisers help clients make the adjustments, they need to deliver suitable plans and good outcomes, whatever market conditions bring. And this will be supported by tools and fund solutions that help advisers deliver solutions that are most tailored to clients’ needs.
James Tothill is investment specialist at Wesleyan