Open-ended property funds reduce risk-return profile: BVI

Open-ended property funds reduce risk in portfolios of both private and institutional investors and improve the risk-return profile - despite lower returns, according to a report published on Wednesday by the BVI, which represents the German investment and asset management industry.

Private investors with a low appetite for risk should target open-ended funds that invest in a diverse range of asset types, as part of a balanced portfolio that includes shares, hedge funds and money markets, the study concludes. The study was carried out by the BVI in conjunction with the WHU Otto Beisheim School of Managament and the Institute for Capital Markets Research and Finance at the Ludwig-Maximilians University in Munich.

By investing in this way, an investor can typically reduce their overall investment risk by 18%. Private investors with a higher risk appetite also benefit: by investing in diversified open-ended funds, as well as other investments such as shares and hedge funds, they can reduce their overall investment risk by around 21%, according to the BVI - and also expect comparable returns.

However, not all of the risk is necessarily priced in, according to Martin Braun, a partner at Cushman & Wakefield in Frankfurt. 'The illiquidity of such funds is often not factored into the risk. The main problem still remains: these funds can't liquidate assets quickly. If you're a fund manger that has bought into a fund that has banned redemptions and you need to access your money, you've got a very real problem,' he said.

When compared to European stock markets – such as the DJ STOXX 600 – between January 1990 and April 2010, open-ended funds have provided higher returns, according to the study.

‘The results of the study clearly show that open-ended funds, by and large, are not as affected by the fluctuations of the stock market,’ said Professor Dr. Lutz Johanning, Chair of Capital Markets Research at the WHU Otto Beisheim School of Management and who was also involved in the study.

According to the study, the optimal weighting to open-ended funds in the portfolio of a risk-averse investor is 18%, or 13% for a more opportunistic investor. These figures represent a slight decrease on 2008 figures of 22% for a traditional retail investor and 32% for a modern retail investor. The decrease is the result of rallying stock markets in both Europe and the US over the past two years, according to the BVI. Nonetheless, open-ended funds continue to be an ‘important component’ in a diversified portfolio, said Professor Dr. Bernd Rudolph, head of the Institute for Capital Markets Research and Finance at the Ludwig-Maximilians University in Munich.