Rated Funds 2014: Four property funds

There is a growing interest in investing in commercial property again. Property prices and rents appear to be reviving as the UK economy recovers. UK investors have an interesting relationship with property. Home ownership in the UK is high and the popularity of buy-to-let has increased dramatically over the past decade.So when investment in commercial property via funds and trusts first started to become popular a decade ago, many investors assumed it was a one-way bet. Then in the global financial crisis the commercial property market suffered badly. Many investors fled the scene.However, amid growing optimism investment in property funds is increasing again. The outlook for the sector continues to improve, so incorporating some exposure in an investment portfolio looks attractive. Property is also the type of asset that does not necessarily move in line with other types of investment, so it is a good form of diversification provided investors are prepared for the inevitable ups and downs.We would normally have rated more investment trusts in this asset class because their closed-end structure means they will not become overwhelmed with cash in the good times or forced sellers in the bad times. However, their share prices reflect these investment trends and currently the majority of trusts with physical property portfolios are on large premiums to net asset value, which make them less attractive. Fortunately, there are open-ended funds that we rate, run by groups with considerable in-house resources, which we believe should provide investors with good property exposure. This year we also think that investors will take a more balanced approach to property, so open-ended funds will be able to cope with flows better. In addition, we have rated a fund and a trust that invest in property securities outside the UK for additional diversification.

To see the full list of Money Observer Rated Funds, click here.

Henderson UK Property

The Henderson UK Property fund is included in included in two Money Observer model income portfolios. It is aimed at income investors and pays one of the highest yields in its sector. It is managed by Marcus Langlands Pearse and Ainslie McLennan, who emphasise the importance of having a robust tenant base strong enough to withstand future economic uncertainties, so that it can maintain its yield.It is around 75% invested physical property. Over 90% of its tenants are low-risk companies such as Tesco, B&Q and Centrica. It has a bias towards property in the south east of England.

Legal & General UK Property

Legal & General UK Property won Money Observer's best property fund award in 2013 for the second consecutive year. It is managed by Michael Barrie and Matt Jarvis and it invests mainly in physical property. They attribute part of its success to the fact that it is well-diversified both in the type and the number of properties it holds.It has holdings in all the different commercial property sectors including industrial, retail and office property. The average holding is valued at less than £10 million. The managers look for properties where they feel they can add value. They have also helped to support property developments.

M&G Global Property Securities

The M&G Global Property Securities fund won our best smaller property fund award last year. Managed by Gillian Tiltman, it invests in the shares of real estate investment trusts and property companies around the world. Investing in real estate securities has the advantage of providing exposure to property but with the liquidity of equities, which gives greater flexibility.It also provides the opportunity to invest in property in parts of the world which may otherwise be difficult to access. Tiltman decides on the overall portfolio construction based on her view of different regions and sectors and aims to exploit pricing anomalies by finding stocks that are currently undervalued. The fund's greatest exposure is currently to the US, Hong Kong and Japan.

TR Property IT

The TR Property Investment Trust is an Editor's Selection. It is managed by Marcus Phayre‐Mudge and invests mainly in the shares of property companies, although up to 15% of the portfolio can be invested in physical property. Its investment universe stretches across continental Europe as well as the UK. It tends to have most in the UK, followed by France and Germany.Phayre-Mudge argues that gaining exposure to property through shares has several advantages including liquidity, diversification, speed of asset allocation, low holding costs and access to good management. He argues that the latter can make a significant difference to property returns. The trust's current exposure to direct property is around 6%. The property is all in the UK and is focused in the south east.

To find out the methodology behind Money Observer's Rated Funds, read: How 2014's Rated Funds were chosen.