GLOBAL – Dutch investment adviser Cardano has said pension funds should reconsider their current "narrow view" of property, often limited to direct holdings, and consider investing in asset-backed securities (ABS) based around a property portfolio.

Richard Urban, property investment manager at the company, said he believed funds were not approaching property investments in the right way.

"Most pension funds get access to property as an investment through buying buildings in prime UK locations," he said.

"However, this is only one of a much broader range of property opportunities, many of which will be attractive at different points in the property market cycle."

He proposed that funds examine the possibility of investing in loan books or ABS backed by a portfolio of properties as an alternative to direct investment, pointing out that both asset classes outperformed the UK-wide property market over the last four years.

Urban said pension funds usually had a "narrow view" of what defined 'property investment', and suggested the mindset should be challenged.

"Most pension funds have very small allocations to ABS backed by properties because they have categorised ABS within their corporate bond portfolios and delegate decisions to their corporate bond fund manager," he said.

"It is time the industry broadened what they understand comes under the property umbrella so their clients can choose the best investment opportunities at each point in the market cycle."

Investment in loan books is hardly unheard of, with several large UK pension schemes in March discussing how best to approach investment in such products, but noting that the costs incurred from asset managers played a part in their hesitation.

Last week saw the European Central Bank amend its regulatory framework, allowing ABS with ratings as low as single A to be used as collateral in euro-zone monetary policy operations.
However, JP Morgan seemed uncertain whether this would boost the ABS market.

In a research note by Gareth Davies of its international ABS and covered bond research desk, the bank noted that the move merely put ABS on a level footing with similar eligible collateral securities – with covered bonds still subject to a more favourable approach.

"We must remember that, under the new regime, ABS bonds, whether distributed to investors or not, are only as 'good' as retained covered bonds in their haircut treatment."

For more on the ABS market and structured credit, see the 'Investing In…' section of the July/August issue of IPE magazine.