Liquidity risk was cited as a key factor behind the decision, along with a belief that the rapid growth in valuations is running out of steam.
“We’ve exited property in each of the UK Morningstar Active Managed Portfolios, completing the gradual reduction we’ve carried out over the past nine months,” said Simon Molica, co-manager of the portfolios.
“After a strong recovery in commercial property valuations over the past three years, we now expect lower total returns from the asset class in the future,” he continued. “While property retains merit for yield-focused income-oriented investors, from a total return perspective our research concludes that greater returns can be achieved in alternative assets in the portfolios. We find this especially so when factoring in the liquidity risk posed by daily-dealing property funds.”
“It is a really interesting time for property,” Molica continued. “It has been extremely strong and I think there are some great risks out there with property and liquidity is one of the real risks people need to be aware of. In this asset class we like to be quite cautious and we like to really exit quite early; as early as possible."
“The returns have been strong and the yield is still good so for some investors it is still appropriate to remain in that asset class,” he said. We don’t think there is going to be as much of a continued recovery in the capital valuations side of property and now the majority of the total return will come from income.”
In terms of where Morningstar has been putting some of the money released from property, Molica cited absolute return as a good option, given that fixed income is “quite expensive” and equities are “broadly around fair value.”